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

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

Yes === 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 a...

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Bibliographic Details
Main Authors: Dowd, K., Buckner, D., Blake, D., Fry, John
Language:en
Published: 2020
Subjects:
Actuarial science
Black '76 model
CBD mortality models
Equity release
No-negative equity guarantee
Prudential regulation
Online Access:http://hdl.handle.net/10454/17567
Description
Summary:Yes === 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.

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