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

Dowd, K; Blake, D; Buckner, D; Fry, J

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Authors

D Blake

D Buckner

J Fry



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.

Journal Article Type Article
Acceptance Date Aug 26, 2019
Online Publication Date Sep 5, 2019
Publication Date Nov 1, 2019
Deposit Date Aug 26, 2019
Publicly Available Date Feb 5, 2021
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
Public URL https://durham-repository.worktribe.com/output/1295158

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