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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: j.s.oberoi@kent.ac.uk
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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 

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