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The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages

Dowd, K., Blake, D. ORCID: 0000-0002-2453-2090, Buckner, D. and Fry, J. (2019). The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages. Economics Letters,

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.

Publication Type: Article
Additional Information: © Elsevier, 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Actuarial Science, Black ’76 model, CBD mortality models, Equity Release, No Negative Equity Guarantee, Prudential Regulation
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce > HF5601 Accounting
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/22705
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