Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-27T14:11:13.115Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  27 October 2014

Doug Andrews  and
Jaideep Oberoi
Doug Andrews
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, 200 University Avenue West, Waterloo, ON, N2L 3G1, Canada
Jaideep Oberoi*
Affiliation:
School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, CT2 7NF, UK
*
*Correspondence to: Jaideep Oberoi, School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, CT2 7NF, UK. Tel: +44 (0) 1227 823865; Fax: +44 (0) 1227 827932; E-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Home equity release products have been promoted as a potential solution to residential long-term care costs for the elderly. Lower than expected utilisation 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. In addition, 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% of the appraised home value if the loan is advanced as a lump sum and 95% if the loan is advanced in instalments.

Keywords

Home equity releaseLong-term care financingno-negative-equity-guaranteeAdjustable rate loanSecuritisation
Type
Papers
Information
Annals of Actuarial Science , Volume 9 , Issue 1 , March 2015 , pp. 85 - 107
Copyright
© Institute and Faculty of Actuaries 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Andrews, D. (2009). Requirements to Make the Housing Asset a Viable Retirement Asset. SOA Monograph M-F109, Society of Actuaries, Schaumburg, IL, USA.Google Scholar
Andrews, D. (2012). Using housing wealth to fund long term care. Paper presented at the International Actuarial Association Colloquium on The Actuarial Profession and Social and Economic Development, Hong Kong, May.Google Scholar
Bailey, M.J., Muth, R.F. & Nourse, H.O. (1963). A regression method for real estate price index construction. Journal of the American Statistical Association, 58, 933–942.Google Scholar
Calnea Analytics (2007). Land Registry house price index methodology. Available online at the address www.calnea.com [accessed 30 June 2013].Google Scholar
Case, K.E. & Shiller, R.J. (1987). Prices of single-family homes since 1970: new indexes for four cities. New England Economic Review, September, 45–56.Google Scholar
Case, K.E. & Shiller, R.J. (1989). The efficiency of the market for single-family homes. American Economic Review, 79, 125–137.Google Scholar
Castle Trust (2014). July 2014 Income Housa Product Termsheet. Available online at the address http://castletrust.co.uk/downloads/income/2014/07/Termsheet/Income Housa - Termsheet July 2014.pdf [accessed 7 September 2014].Google Scholar
Davidoff, T. (2004). Maintenance and the home equity of the elderly, working paper, Fisher Center for Real Estate and Urban Economics, University of California, Berkeley, Berkeley, CA.Google Scholar
Davidoff, T. (2010). Home equity commitment and long term care insurance demand. Journal of Public Economics, 94, 44–49.Google Scholar
Dilnot, A., Warner, N. & Williams, J. (2011). Fairer Care Funding: The Report of the Commissio n on Funding of Care and Support. Commission on Funding of Care and Support, Government of United Kingdom, United Kingdom.Google Scholar
Dorling, D. & Cornford, J. (1995). Who has negative equity? How house price falls in Britain have hit different groups of home buyers. Housing Studies, 10, 151–178.Google Scholar
Fabozzi, F.J., Shiller, R.J. & Tunaru, R.S. (2012). A pricing framework for real estate derivatives. Journal of European Financial Management, 18, 762–789.Google Scholar
Gagne, R., Corliss, G., Campbell, K., Ho, C., Koklefsky, B., Lucas, R., Oberman-Smith, S., Perry, E., Purushotham, M. & Shaughnessy, M. (2011). Long-Term Care Experience Committee Intercompany Study Report 6 1984–2007. Society of Actuaries, Schaumburg, IL, USA.Google Scholar
Goodman, L.S., Yang, L. & Landy, B. (2013). The first GSE risk-sharing deal: an effective risk transfer mechanism? The Journal of Structured Finance, 19, 33–42.Google Scholar
Hancock, R. (2000). Estimating the housing wealth of older home owners in Britain. Housing Studies, 15, 561–579.Google Scholar
Hosty, G.M., Groves, S.J., Murray, C.A. & Shah, M. (2008). Pricing and risk capital on the equity release market. British Actuarial Journal, 14, 41–91.Google Scholar
Ji, M., Hardy, M. & Li, J.S.-H. (2011). Markovian approaches to joint-life mortality. North American Actuarial Journal, 15, 357–376.Google Scholar
Ji, M., Hardy, M. & Li, J.S.-H. (2012). A semi-Markov multiple state model for reverse mortgage terminations. Annals of Actuarial Science, 6, 235–257.Google Scholar
Kuo, C.-L. (1994). Serial correlation and seasonality in the real estate market. Journal of Real Estate Finance and Economics, 12, 139–162.Google Scholar
Land Registry (2013). Search the index. Available online at the address http://www.landregistry.gov.uk/public/house-prices-and-sales/search-the-index [accessed 22 January 2013].Google Scholar
Leather, P. (1990). The potential and implications of home equity release in old age. Housing Studies, 5, 3–13.Google Scholar
Li, J.S.-H., Hardy, M.R. & Tan, K.S. (2010). On pricing and hedging the no-negative-equity-guarantee in equity release mechanisms. Journal of Risk and Insurance, 77, 499–522.Google Scholar
Northern Ireland Housing Executive (2010). Research into the Future Housing and Support Needs of Older People: Assessment of the Potential of Equity Release for Older Owner – Occupiers. Northern Ireland Housing Executive, Northern Ireland.Google Scholar
Ong, R. (2009). House price appreciation in old age: analysis and issues for the use of reverse mortgages as a retirement funding strategy in Australia. Population Ageing, 2, 139–160.Google Scholar
Overton, L. (2010). Housing and Finance in Later Life: A Study of UK Equity Release Customers. Age UK, London.Google Scholar
Shiller, R.J. & Weiss, A.N. (1999). Home equity insurance. Journal of Real Estate Finance and Economics, 19, 21–47.Google Scholar
Shiller, R.J. & Weiss, A.N. (2000). Moral hazard in home equity conversion. Real Estate Economics, 28, 1–31.Google Scholar
Sutherland, S. (1999). With Respect to Old Age: Long Term Care – Rights and Responsibilities: A Report by The Royal Commission on Long Term Care. Stationary Office, UK.Google Scholar