Optimal prepayment of Dutch mortgages

B.H.M. Kuijper*, P.C. Schotman

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Valuation of the prepayment option in dutch mortgages is complicated. In the netherlands, mortgagors are not allowed to prepay the full mortgage loan without a compensating penalty. Only a limited amount of the initial mortgage loan can be prepaid penalty-free. We introduce a general model formulation for the valuation of limited callable mortgages, based on binomial trees. This model can be used for determining both the optimal prepayment strategy and the value of embedded prepayment options. For some mortgage types the prepayment option can be valued exactly, whereas other types require approximative methods for efficient valuation. The heuristic we propose here determines the prepayment option value efficiently and accurately for general mortgage types.
Original languageEnglish
Pages (from-to)137-155
Number of pages19
JournalStatistica Neerlandica
Issue number1
Publication statusPublished - 1 Jan 2007

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