In Asleep at the Wheel, I set out a base case No-Negative Equity Guarantee (NNEG) valuation based on a bunch of assumptions. Suppose I am 70 years old, have a house worth £100 and get an equity release loan of £40. Suppose too that the risk-free interest rate is 1.5%, the net rental rate is 2%, the loan rate is 5% and so on.
In this base case, my NNEG model comes up with a NNEG valuation – this valuation is the same as the cost of the NNEG to the lender – of £20.8, which is 52% of the amount loaned.
Remember too that we value the NNEG using information available now. As Dean and I have explained in various places (see here and here), our NNEG valuation is not dependent on a forecast of any future variable.
Continue reading “A bet on the house”
