Abstract

The main purpose of this paper is to show the way to conduct a risk based mortgage loan choice process for low and middle income households in Turkey. There are several studies that analyze the impact of buying a house decision on an investor’s portfolio, which consists of house, stocks and bonds. In this study, house is treated as a single investment. The probability of defaults for the cash flows based on mortgage payments, rents, down payment and depreciation are calculated in order to find the amount of mortgage loan for a given rent and maturity. Net present values of cash flows related with buying a house are calculated via stochastic interest rates based on historical simulation. It is found that the amount of mortgage loan can be determined by risk based approach and a rational choice can be made in terms of household risk management.

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