The Impact of Innovated Mortgage Payment on Labor’s Optimal Portfolio

Due to the diversification of financial instruments, the labor can adjust the mortgage payment to maximize personal utility function. We derive the optimal asset allocation by the different mortgage payment, and find that the labors who are more risk averse tend to take conservative strategy of investment. Because of the variation of labor income and mortgage payment, the allocation of risky asset will show different. The labor will try to increase the tendency of saving from income and hesitate to hold risky asset, and so become more conservative. We also find when there is positive correlation between the current mortgage payment and stock returns, the labor will increase the risky asset in his portfolio and exhibits more aggressive strategy. In other words, the more mortgage payment and stock returns, the more risky asset the labor will hold in order to diversify the assets. On the other hand, the labor who reduces the mortgage payment and find the stock return drop will re-evaluate the cost of risky assets. Finally, the labor will choose an aggressive strategy to allocate risky asset. Because of the different characteristic in everyone’s job situation, some labors can afford mortgage payment persistently and some can not. Some labors may lose job in a harsh environment and are not able to pay the mortgage payment. From the three scenarios we discussed above, the labor will take conservative strategy when facing unemployment or retirement.