Analysis

Back-Testing

We know what mortgage rates were in the past.  And we know the past performance of equities markets.  Hence, we can “create” past Index Mortgages and track their performance against equivalent traditional mortgages.  This is called “back-testing”.

We back-tested two cohorts of 15,706 pairs of mortgages, one pair for each day in the period from 31 December 1979 to 30 December 2022.  In the first ensemble, one mortgage in each pair was a traditional mortgage and the other was an equivalent Index Mortgage with a 20% Link.  In the second ensemble, one mortgage in each pair was a traditional mortgage and the other was an equivalent Index Mortgage with a 10% Link.  For a better understanding of the testing methodology, click here.

In short, the Index Mortgage proved to be a better choice than the traditional mortgage on more than 94% of occasions for the 20% Link and more than 86% of occasions for the 10% Link .  To see a breakdown of the results, click here.  To see the amortisation of any any given pair of such mortgages, click here.

Use Cases

We also tested the Index Mortgage against three “borrow to invest” scenarios.  Click here to download that analysis.

Conclusion

We conclude that the Index Mortgage is a robustly superior alternative to any combination of traditional credit and investment products.  This is borne out by empirical analysis (back-testing) and is consistent with fundamental economic theory (the equity risk premium).

“The Index Mortgage is an excellent concept.  We have no hesitation in awarding it a “green light …””

Citigate Dewe Rogerson, LaunchSure Report