What is ‘Half-Life’

Half-life represents a date in the future when half of the total principal of a mortgage-backed security (MBS) will be paid off. It can also represent the date when half of a person’s private mortgage principal is paid off. While an estimate can be made as to what the half-life will be, it is not definite as the variables of the security or mortgage may change.

Explaining ‘Half-Life’

Half-life, when it comes to real estate investment vehicles, is the half-way point of a mortgage repayment. For an MBS, this means that the half-life occurs when half of the aggregate principle of underlying mortgages is paid. The time taken to reach half-life is dependent upon interest rates. As interest rates fall, the principle will be paid off quicker as homeowners refinance their mortgages. Similarly, as interest rates increase, the half-life will increase as homeowners take longer to pay off their principle.

Example of a Single Mortgage’s Half-Life

A mortgage’s half-life is the halfway point of principle repayment and doesn’t include interest payment. However, the higher the interest, the longer it will take to reach the principal’s halfway point. Let’s say, for example, that a person takes out a 30-year mortgage for $100,000 to purchase a home, with a 5% interest. This makes his monthly payment around $500, which starts with a high amount of interest and declines over time as more principal is paid. In this scenario, it will take more than 19 years to pay off half the mortgage’s principle, due to the effects of interest.

The Half-Life of an MBS

Like the example above, a MBS reaches its half-life after the combined principle of the underlying mortgages are paid off. Some of the mortgages are paid off quicker than others, and the average half-life of an MBS is about 12 years. However, there are extension risks associated with all MBS securities. The reason why the expected half-life is normally 12 years is that some of the underlying mortgages conduct prepayments to shorten the length of the mortgage. When interest rates rise, prepayments decline and the length of the half-life increases.

Further Reading

  • Unbiased estimation of the half-life to PPP convergence in panel data – www.nber.org [PDF]
  • Half-life estimation based on the bias-corrected bootstrap: A highest density region approach – www.sciencedirect.com [PDF]
  • " Financial Management'" s Success as an Academic Journal – www.jstor.org [PDF]
  • Unbiased Estimation of the Half‐Life to Price Index Convergence among US Cities – onlinelibrary.wiley.com [PDF]
  • The hepatitis C virus NS5A inhibitor daclatasvir has a dual mode of action and leads to a new virus half-life estimate – www.tandfonline.com [PDF]
  • Confidence intervals for half-life deviations from purchasing power parity – amstat.tandfonline.com [PDF]
  • Cost of patients with hemophilia A treated with standard half-life or extended half-life FVIII in Spain – www.tandfonline.com [PDF]
  • Stochastic volatility as a simple generator of apparent financial power laws and long memory – www.tandfonline.com [PDF]
  • Biological half-life of cadmium in the urine of inhabitants after cessation of cadmium exposure – www.tandfonline.com [PDF]
  • Real interest parity (RIP) over the 20th century: new evidence based on confidence intervals for the largest root and the half-life – www.sciencedirect.com [PDF]