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Pricing of no negative equity guarantee
The UK Prudential Regulation Authority expressed concerns in 2018 that firms investing in ERMs should 'properly reflect' the cost of the no-negative-equity guarantee. Its consultation paper CP 13/18, published 2 July 2018, provided a benchmark for valuing the guarantee. The paper recommended modelling the guarantee as a series of put options expiring at each period in which cash flows could mature, weighted by the probability of mortality, morbidity and pre-payment, using a version of the Black–Scholes pricing formula. It recommended that the underlying price of the option should reflect the cost of deferred possession of the property, independent of any assumptions about future property growth, warning that many of the approaches presented to it implicitly assumed negative deferment rates.
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- Mortgage loan
- Equity loan
- Mortgage law
- UK mortgage terminology
- Reverse mortgage, the American equivalent
- PIV, the Italian equivalent
- "Consultation Paper CP 13/18" (PDF). Bank of England. 2 July 2018. Retrieved 5 August 2018.