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Home equity release for long term care financing: an improved market structure and pricing approach

Andrews, Doug W., Oberoi, Jaideep S (2015) Home equity release for long term care financing: an improved market structure and pricing approach. Annals of Actuarial Science, 9 (1). pp. 85-107. ISSN 1748-4995. (doi:10.1017/S1748499514000268) (KAR id:48176)


Home equity release products have been promoted as a potential solution to residential long term care costs for the elderly. Unexpectedly low utilization of home equity release loans has prompted efforts to better model and price the No-Negative-Equity-Guarantee (NNEG) built into the contracts, but loan rates are still widely perceived by homeowners as being unattractive.. We propose the introduction of a new adjustable rate loan based on a regional house price index, with the NNEG being borne by a specially created intermediary. The proposed approach allows us to directly address and separately price the basis risk between individual house price returns and index returns. Additionally, it offers the opportunity to create securities based on residential real estate that would be attractive to a wider class of investors. The alternative risk-sharing mechanism creates a more transparent and simple pricing structure for the loans. We then use house sales data to demonstrate the approach. We find in our sample that it would be possible to make higher loans than seen in previous literature using standard roll-up contracts. In the most favourable scenario for our simulations, the maximum loan is 89 per cent of the appraised home value if the loan is advanced as a lump sum and 95 per cent if the loan is advanced in instalments.

Item Type: Article
DOI/Identification number: 10.1017/S1748499514000268
Uncontrolled keywords: Home equity release; Long term care financing; No-negative-equity-guarantee; Adjustable rate loan; Securitization; House price index; Basis risk
Subjects: H Social Sciences > HG Finance
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Department of Accounting and Finance
Funders: Organisations -1 not found.
Depositing User: Jaideep Oberoi
Date Deposited: 04 May 2015 12:27 UTC
Last Modified: 09 Dec 2022 05:04 UTC
Resource URI: (The current URI for this page, for reference purposes)

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