Structuring and Pricing Home Equity Release With Better Sharing of House Price Risk

Abstract

We present the structure and pricing of a home-equity-release product designed for senior homeowners with a more efficient risk-sharing than traditional reverse mortgages. The homeowner borrows against their home with the protection of a no-negative-equity-guarantee (NNEG), but the repayment is based on the return on a regional house-price-index and a fixed premium to cover the NNEG. This product provides greater access to equity release for retirement-age homeowners and a wider range of investment products for investors. The rearrangement of the payoff structures described in our model allows for higher upfront loan to value ratios than have traditionally been available in the industry. We illustrate the associated payoffs with the use of 20 years of home sales data from the United Kingdom (UK), up-to-date UK mortality data, and an updated UK morbidity study.

Keywords: home-equity-release, no-negative-equity guarantee, reverse mortgages, securitization

JEL Classification: G13, R39