Proving The Benefits


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 13,638 pairs of mortgages, one pair for each day in the period from 31 December 1979 to 2 May 2017.  One mortgage in each pair was a traditional mortgage.  The other was an Index Mortgage.  For a better understanding of the testing methodology, click here to download a PDF file.

In short, the Index Mortgage proved to be a better choice for the borrower than an equivalent traditional mortgage on more than 92% of occasions.  To see a breakdown of the results, click here.  To see the amortisation of any any given pair of mortgages, click here.

Testing Through Simulation

One obvious deficiency to back-testing is that there is a single known past, whereas there are many possible futures.  That issue is partially addressed by back-testing over the long term, because the long term past embodied economic cycles that are likely to repeat over the long term future.

But the problem of future uncertainty can be addressed in another way, namely through Monte Carlo simulation.  To understand what Monte Carlo simulation is click here to download a PDF file.

We tested the Index Mortgage by undertaking 200,000 Monte Carlo simulations.  For a better understanding of the simulation methodology, click here to download a PDF file.  These simulations essentially confirm the back-testing program, demonstrating that the Index Mortgage was the superior choice more than 92.02% of the time.

Special Case Comparisons

Finally, we tested the Index Mortgage against an equivalent 100% offset mortgage and a structured “borrow to invest” scenario.  We report the results of those analyses in two White Papers that can be downloaded here and here.

In each case we began with a baseline scenario that engaged proved, historic values for key variables.  In each case the Index Mortgage proved the better option.  We then “stressed” those parameter sets to show that no reasonably conceivable permutation could deny that superiority.

In short, we say the Index Mortgage is a robustly superior alternative to any combination of traditional credit or investment products.

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

Citigate Dewe Rogerson, LaunchSure Report