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The valuation of no-negative equity guarantees and equity release mortgages

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  • Dowd, Kevin
  • Buckner, Dean
  • Blake, David
  • Fry, John

Abstract

We outline the valuation process for a No-Negative Equity Guarantee in an Equity Release Mortgage loan and for an Equity Release Mortgage that has such a guarantee. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5, M6 and M7 mortality versions of the Cairns–Blake–Dowd (CBD) family of mortality models. Results indicate that the valuations of No-Negative Equity Guarantees are high relative to loan amounts and subject to considerable model risk but that the valuations of Equity Release Mortgage loans are robust to the choice of mortality model. Results have significant ramifications for industry practice and prudential regulation.

Suggested Citation

  • Dowd, Kevin & Buckner, Dean & Blake, David & Fry, John, 2019. "The valuation of no-negative equity guarantees and equity release mortgages," Economics Letters, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:ecolet:v:184:y:2019:i:c:s0165176519303349
    DOI: 10.1016/j.econlet.2019.108669
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    References listed on IDEAS

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    Cited by:

    1. Sharma, Tripti & French, Declan & McKillop, Donal, 2022. "The UK equity release market: Views from the regulatory authorities, product providers and advisors," International Review of Financial Analysis, Elsevier, vol. 79(C).
    2. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.
    3. Badescu, Alexandru & Quaye, Enoch & Tunaru, Radu, 2022. "On non-negative equity guarantee calculations with macroeconomic variables related to house prices," Insurance: Mathematics and Economics, Elsevier, vol. 103(C), pages 119-138.
    4. Buckner, Dean & Dowd, Kevin, 2020. "How profitable are Equity Release Mortgages?," Economics Letters, Elsevier, vol. 197(C).
    5. Kevin Engelbrecht & Saul Jacka, 2020. "Pricing and Hedging the No-Negative-Equity Guarantee in Equity-Release Mortgages," Papers 2010.02511, arXiv.org.

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    More about this item

    Keywords

    Actuarial science; Black ’76 model; CBD mortality models; Equity release; No-negative equity guarantee; Prudential regulation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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