Risk and Equity Release Mortgages in the UK
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Risk and Equity Release Mortgages in the UK Tripti Sharma 1 & Declan French 2
& Donal
McKillop 2
Accepted: 11 September 2020/ # The Author(s) 2020
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
Introduction Many older people in the UK have experienced significant house price growth and are increasingly been encouraged by government to see their home as a means to support retirement incomes and to pay for social care. We argue in this paper that the provision of financial products such as equity release mortgages (ERM) is so inherently risky that
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11146-02009793-2) contains supplementary material, which is available to authorized users.
* Declan French [email protected]
1
Cork University Business School, University College Cork, College Road, Cork, Ireland
2
Queen’s Management School, 185 Stranmillis Road, Belfast BT9 5EE, UK
T. Sharma et al.
elderly homeowners in most regions of the UK could not use their home in this way even with government subsidies. Elderly housing assets have been central to policy debates about state funding of social care and retirement planning over the past decade. Currently, property wealth is used in means-testing for government support with residential care costs and additional costs are then paid from selling the home or from deferred payments from the estate after death. Recent policy initiatives suggest that state funding could be supplemented by a private insurance scheme potentially sourced from equity release or downsizing (CPS 2019). Housing equity is also seen as having a key role in releasing money to adapt homes for the complex needs of the elderly and to address pension shortfalls (FCA 2017). The House of Lords Ready for Ageing report aimed to work with the financial services industry to help people with housing equity to release it simply without excessive charges or risk (Lords 2013). However, the equity release market in the UK is still small relative to the more mature US reverse m
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