Mortgages denominated in domestic and foreign currencies: Simple models

Julia Király () and Andras Simonovits ()
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Andras Simonovits: Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, also Mathematical Institute of Budapest University of Technology, and Department of Economics of CEU

No 1513, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: After the short temporary popularity of FX denominated loans, during the Great Financial and Economic Recession (2007–2013), the burden of these loans has become unaffordable for a lot of borrowers. We have designed a family of simple models to compare the cash flows of installments and the paths of outstanding debts denominated in domestic and foreign currencies, respectively. Having these models, we are able to draw several conclusions relevant to the recent debates about the foreign currency denominated loans. Our study demonstrates the key role played by the uncovered interest rate parity in comparisons. Moreover, we give a closed-form solution for the trade-off between the depreciation and the unilateral interest rate increases by the banks. In a simple model, we determine the optimal size for domestic and foreign currency denominated loans, respectively.

Keywords: mortgage; currency denominated loan; credit crisis; payback models with annuity (search for similar items in EconPapers)
JEL-codes: C63 D14 G21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-02
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Related works:
Journal Article: Mortgages Denominated in Domestic and Foreign Currencies: Simple Models (2017)
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