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

Dowd, Kevin; Blake, David; Buckner, Dean; 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.

Citation

Dowd, K., Blake, D., Buckner, D., & Fry, J. (2019). The valuation of no-negative equity guarantees and equity release mortgages. Economics letters, 184, Article 108669. https://doi.org/10.1016/j.econlet.2019.108669

• Journal Article Type: Article
• Acceptance Date: Sep 3, 2019
• Online Publication Date: Sep 5, 2019
• Publication Date: 2019-11
• Deposit Date: Feb 4, 2022
• Journal: Economics letters
• Print ISSN: 0165-1765
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 184
• Article Number: 108669
• DOI: https://doi.org/10.1016/j.econlet.2019.108669
• Keywords: Actuarial science; Black ’76 model; CBD mortality models; Equity release; No-negative equity guarantee; Prudential regulation
• Public URL: https://hull-repository.worktribe.com/output/3921073
• Related Public URLs: https://dro.dur.ac.uk/28939/