Introduction
Half-life is a terminology used to represent a future date when half of the overall principle of mortgage-backed security (MBS) or any other kind of bond or debt will be getting paid. When an approximation is to be made as to how the half-life is going to be, it is not certain as the fluctuations of the mortgage or security can change.
Breaking Down Half-Life
When it comes to real estate, half-life means the halfway point of repayment of a mortgage. In the case of mortgage-backed securities, home loans are issued by issuing banks or housing finance companies (HFCs) to a government-sponsored enterprise (GSE) or a financial company and then put together to create a single investible asset or security. Meaning, the half-life happens when half of the total principal mortgages are repaid.
The time that an individual takes in order to touch half-life depends on the rate of interest. As the cost of borrowing goes on to fall, the principal will be repaid in a much shorter time span as the property owners can look at options to refinance their loans at much lower interest rates. On the other hand, if the rate of interest rises, then the half-life will also increase as the borrowers will be taking much more time to repay the outstanding amount of their mortgage.
Example
The half-life of a mortgage is the halfway stage of the principal repayment and does not cover the interest paid so far. Nevertheless, the more the interest paid, the longer will it take to land at the halfway point of the principal.
For example, consider an individual takes about 30 years mortgage for Rs 1,00,000 to purchase a house at an interest rate of 5%. This will make that individual’s equated monthly instalments about Rs 500. This will contain a higher portion of interest and reduces as the principal starts getting paid up. In this case, the individual takes around 19 years to reach half-life.
