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

Dowd, K. and Blake, D. and Buckner, D. and Fry, J. (2019) 'The valuation of no-negative equity guarantees and equity release mortgages.', Economics letters., 184 . p. 108669.

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.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1016/j.econlet.2019.108669
Publisher statement:© 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/
Date accepted:26 August 2019
Date deposited:27 August 2019
Date of first online publication:05 September 2019
Date first made open access:05 February 2021

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