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On the design of mortgages and the need for indexation

Published online by Cambridge University Press:  17 February 2009

F. C. Gair
F. C. Gair
Affiliation:
Department of Mathematics, University of Canterbury, Christchurch 1, New Zealand.
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Abstract

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There is a well-recognized need for a mortgage instrument that will operate satisfactorily in the presence of a volatile inflation. This paper analyses a large class of mortgages—the ‘continuous mortgage’ (CM)—as a basis for such design. In particular, it is shown that the real (inflation-adjusted) payment stream is exponentially sensitive to changes in the real interest rate. Consequently to realize a satisfactory design, the mortgage must be indexed by assigning the real interest rate. Then, under appropriate restraints, the CM offers a continuum of satisfactory mortgage designs.

Type
Research Article
Information
The ANZIAM Journal , Volume 26 , Issue 1 , July 1984 , pp. 56 - 76
Copyright
Copyright © Australian Mathematical Society 1984

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