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

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. •The valuation of NNEGs and ERMS is under-explored academically.•This occurs alongside documented evidence of widespread practitioner mispricing.•We solve by combining the Black ’76 model with the CBD family of mortality models.•Concerns over the sector’s viability and regulation give results added significance.