Mortgage hedging

The introduction of a new instrument that links the size of the mortgage with the development in house-prices. From the economist

FOR most homeowners, their house is their biggest single financial asset and their mortgage is their biggest single liability. House-price inflation has normally made this a good bet. But it makes little sense in financial theory for investors to borrow a lot to speculate on a single asset class. This is particularly true when high house prices in many nations have forced many buyers to take on debts that are a substantial multiple of their incomes.

The answer, according to Zurich Cantonal Bank, is to link the value of the loan to that of the property. On September 18th it launched a new product that offers two ways of doing so. One version includes a put option (a kind of insurance) linked to Zurich's house-price index. At a cost of around 0.5% a year, this option ensures that, if regional house prices fall, the size of the loan will decline in tandem. The second version links the level of the mortgage rate to the house-price index.