[New post] How does house price indexation affect the valuation of equity release mortgages?

Craig Turnbull

Equity Release Mortgages (ERMs) are different from traditional mortgages. Both mortgages provide an upfront cash lump sum. But traditional mortgages are tied to an immediate home purchase that is repaid over a set period, while equity release mortgages are tied to a share of a future home sale. In this blog post, I examine some of the challenges with valuing equity release mortgages. Specifically, I focus on the approaches used to estimate the current home value – a key input to the mortgage valuation – which typically involves applying a simple house price index return to the most recent house survey valuation or transaction price. I show this widespread approach may understate equity release mortgage risks and overstate portfolio values.