The purpose of this thesis is to analyze and evaluate the optimal type of mortgage loan for a private borrower based on his interest rate expectations. The Danish mortgage market is a unique financing model and for a Danish property owner, the cheapest way of financing. The optimal choice of loan is being evaluated from a cost perspective and the thesis is limited to include three generic types of loans with maturity of 30 years; fixed 3 % mortgage loan and two types of adjustable interest rate loans called F1 (repricing every year) and F5 (repricing every fifth year). The three types of loans are compared by estimating the total interest costs for each loan. In the thesis, a model for estimating interest rate costs is developed. The model is based on simulations of interest rate term structures. The model is derived from the Vasicek model, which contains three parameters; mean reversion, mean reversion rate and volatility. To cover a wide spectrum of differences in interest expectations, three generic interest rate term structures are introduced. These are called Japanese scenario, Goldilocks scenario and reflation scenario. The optimal choice of loan is evaluated both with and without the possibility to convert. During the thesis it has been necessary to make assumptions in regards to the model and its input parameters and these assumptions will influence the results of the analysis. Models and assumptions are criticized continuously throughout the thesis while their impacts on the results are being discussed. Conclusively, both of the analyses show that F1 is the most favorable loan in the Japanese scenario, while the fixed rate mortgage loan is the most favorable in the reflation scenario. In the Goldilocks scenario the conclusions are not clear. The conducted analyses show that the fixed rate mortgage loan and the F1 loan are equally favorable in this scenario. The cost of the loan is not the only factor that determines the decision making regarding mortgage loan. A significant factor is the borrower’s risk preferences. This factor's impact on the conclusions is being discussed throughout the thesis.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||122|