Which mortgage option, fixed or floating interest rates, offers greater financial benefits to Belgian private mortgage borrowers?

Details

Supervisors

Vrins, Frédéric

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enThis thesis investigates the cost effects of fixed and floating interest rate mortgages to Belgian private borrowers. Using historical data, simulation techniques, and stochastic interest rate models, we compare the total discounted cost of various mortgage structures. The analysis includes fixed-rate mortgages based on data from the broker Immotheker Finotheker, 10-year OLO yields, and swap rates, as well as floating-rate mortgages with reset frequencies 1/1/1, 3/3/3, and 5/5/5. Results indicate that floating-rate mortgages, particularly the 1/1/1 type, are generally more cost-effective in a declining or stable interest rate environment, but at the cost of instability in monthly payments. Fixed-rate options, while offering greater stability, tend to result in higher overall costs. Refinancing opportunities were also examined, and the results indicate that profitability depends on the volatility of the data used. Finally, simulations based on the Vasicek model also confirm the relative advantage of floating rates in most cases. These findings emphasize the importance of the borrower risk tolerance, interest rate expectations, and loan characteristics when choosing a mortgage structure.