Risk and Equity Release Mortgages in the UK

35 Pages Posted: 11 Jan 2020

See all articles by Tripti Sharma

Tripti Sharma

University College Cork - Cork University Business School

Declan French

Queen's University Management School

Donal G. McKillop

Queen's University Management School

Date Written: December 22, 2019

Abstract

Accessing elderly housing wealth through equity release mortgages (ERMs) continue to be the focus of policy debates about how to pay for social care and how to support retirement incomes in the UK. We demonstrate in this paper that the spatial concentration of this market in just a few regions is not due to demand but to the risks faced by suppliers. We show that by ignoring regional variations in No Negative Equity Guarantee risk in national pricing models providers cannot profitably supply these products outside areas of high house price growth. We also show that EU Solvency II capital requirements provide a further disincentive to supply ERMs in these areas. Government subsidies to product provision are also modelled and shown to be infeasibly high. We therefore conclude that the government policy focus on equity release as a means of tackling the challenges of an ageing population is misplaced.

Keywords: Reverse mortgages, equity release, no negative equity guarantee, solvency II

JEL Classification: G21, G22, J14

Suggested Citation

Sharma, Tripti and French, Declan and McKillop, Donal G., Risk and Equity Release Mortgages in the UK (December 22, 2019). Available at SSRN: https://ssrn.com/abstract=3508312 or http://dx.doi.org/10.2139/ssrn.3508312

Tripti Sharma

University College Cork - Cork University Business School ( email )

West Wing, Main Quadrangle, College Road
Cork
Ireland

Declan French (Contact Author)

Queen's University Management School ( email )

185 Stranmillis Road
Belfast, Northern Ireland BT9 5EE
United Kingdom

Donal G. McKillop

Queen's University Management School ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

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