University of Twente Student Theses


Framework for Implementing the Take-Along Option in the Valuation of a Mortgage Portfolio

Doornik, S.R. van (2022) Framework for Implementing the Take-Along Option in the Valuation of a Mortgage Portfolio.

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Abstract:Financial institutions originate mortgages that are placed on their balance sheet and therefore need to be valued. In addition, these financial institutions offer multiple options for their customers on their mortgage that can suit their respective preferences. One of these options is the take-along option, where someone who relocates to a new home has the opportunity to take-along their mortgage and their respective mortgage rate as initially contractually agreed. In an increasing interest rate environment, it becomes more rational to take-along a mortgage rate that is below the current market rate and therefore it is expected that this option will be exercised more often. Based on literature review, it appears that the take-along option is currently not factored in the valuation of a mortgage portfolio. In this thesis a framework is proposed how to incorporate the take- along option in the valuation of a mortgage portfolio. A literature review has been performed to investigate the methods used to value a mortgage portfolio. In literature the prepayment option is both valued using an option-based and econometric approach. The framework in this research is based on the econometric approach. The prepayment option is included by using the conditional prepayment rate (“CPR”). It is expected that the CPR will change due to the take-along option, given the borrower in case of relocation has either the option to exercise the take-along option or to repay the mortgage. If the market mortgage rate is higher than the coupon (i.e. negative prepayment incentive) the borrower would tend to exercise the take-along option instead of prepaying the mortgage, which would result in a lower CPR and thereby impacting the valuation. The framework has been applied to a mortgage portfolio representing the Dutch mortgage market. The data has been constructed by public available data from de Nederlandsche bank (“DNB”), which hence represents a case study. In the results the cashflow changes and the NPV values are compared with the following options: no options involved, only the prepayment option (caused by relocating) included, the base take-along option and a scenario take-along option considering a representative example that takes into account specific terms and conditions applied by a financial institution in the Netherlands.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
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