City Research Online

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 (PI-1911). London, UK: Pensions Institute.

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: Monograph (Discussion Paper)
Publisher Keywords: Actuarial Science, Black ’76 model, CBD mortality models, Equity Release, No Negative Equity Guarantee, Prudential Regulation
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: https://openaccess.city.ac.uk/id/eprint/23902
[img]
Preview
Text - Published Version
Download (1MB) | Preview

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login