For most people, deciding to take a massive loan, often several times their annual income, to buy a single asset is the biggest financial call they will ever make. Yet, in India and across the rich world, opting for a home loan or mortgage is often seen as an obvious step. This decision typically involves less soul-searching than planning retirement savings or allocating funds between stocks and bonds.
The Natural Short Position in Property
One major driver is the long-term performance of housing markets. Since the 1950s, property prices in developed nations have shown strong growth, despite occasional downturns. More crucially, everyone needs a place to live. If you do not own a home, you are essentially in a 'short' position against property prices. You are exposed to the risk of rising costs for your entire life, whether you pay rent or eventually buy. Purchasing a home closes this risky short exposure, creating a neutral stance. Unlike other investments, it is not purely a speculative bet on price appreciation. The mortgage is often a necessary tool for those without full cash, not a deliberate gamble on future interest rate movements.
Your Mortgage: A Bond in Disguise
Viewing a home loan as part of an investment portfolio might seem unusual, but it is perfectly logical. A fixed-rate mortgage behaves very much like a bond, while a floating-rate loan resembles corporate debt. By taking a mortgage, the investor does more than just neutralise their property risk. They open a significant short position in a bond-like asset. For many, especially first-time buyers, this short position is by far the largest in their portfolio, overwhelming any other holdings.
Fixed-rate mortgages can have the most dramatic impact on a portfolio's value. Borrowers usually track only the outstanding balance. However, the loan's true economic value fluctuates like a bond: it increases when market interest rates fall (a loss for the borrower) and decreases when rates rise. This seems counterintuitive with fixed repayments. It occurs due to the 'time value of money'—the present value of future fixed payments changes when discount rates (interest rates) move. This is the same principle that causes bond prices to rise when yields fall.
Transforming the Investor's Profile
So, what does this mean for an individual's overall financial picture? The short position from a large fixed-rate mortgage can drastically alter an investor's asset allocation. Imagine a classic portfolio with a 60/40 split between stocks and bonds. If you add a fixed-rate mortgage worth 20% of your savings, your effective exposure shifts to something closer to 60/20. This effect is softened in markets like America and Denmark, where borrowers can often prepay without penalty if rates move against them, making the debt less bond-like.
For typical first-time buyers in India, where the loan size often dwarfs other savings, the effect is magnified. If your mortgage short position is larger than your total savings, you cannot have a net positive exposure to bonds, no matter how many you buy. Your portfolio starts to resemble a leveraged hedge fund strategy: heavily short on one side (bonds via the mortgage) and long on stocks for growth. There is a silver lining: unlike a hedge fund, a stock market crash won't wipe you out because the debt is secured against your house, not your equity portfolio. Perhaps carrying a mortgage isn't such a terrible burden after all.
