Transcript Home Equity Release - New Zealand Society of Actuaries

Home Equity
Release
Demystifying and reigniting the category
HER – A complex Product
Attitudes to HER have changed
over time
Family home hard to plan as
inheritance
NNEG critical element of HER loan
HER annuities an attractive product
Reversions provide maximum cash
but create winners and losers –
higher LVR alternative?
HER Interest Bases – a range of
alternatives
Variable interest
best – perhaps
with CAP
Fixed for term or
life – penalties on
VMO an issue
Interest linked to
CPI
An aging population requires a radical shift in
thinking
New Zealand Age Profile
58%
53%
49%
< 20
20-64
29%
25%
24%
18%
18%
11%
9%
85+
3%
1%
2006
65-84
2031
2056
Source: NZ Dept of Statistics Projections
HER model operates under a
range of assumptions
Adjusted Population Mortality
Move-to-Care developed from
AIHW statistics
Voluntary-Move-Out often health
related
Joint lives – adjusted single life
Interest differential over HPI –
about 4.5% a year
Issue expenses relatively high
Solvency Reserving for HER
Conservative figures for mortality and other moveouts
Similarly, conservative assumptions on interest and HPI
– adjust house values to cyclical trend low
Major issue as whether need to zeroize negative
reserves
Simulation probably a better measure of risk
Simulation – modelled to reflect
market reality
Base pattern of cyclical rates of interest and HPI
- Adjust each run for Normal stdev of 5% each year
Regional and individual variations on each loan of Normal stdev
7.5% each year
Random by probability rate for exits, top-ups
Discounted profit-flows sorted in ascending order to assess VaR and
tVaR at various %
Funding has always been the main
consideration
HER a strong match with Annuities –
achieved by Pension Fund investing
in HER - or HER investing in annuities
Securitization another long term
funding mechanism
Rating agencies extended RMBS
thinking to HER without re-assessing
long term interest
HPI assumptions – ultra conservative
assumptions will hinder HER product
development
Cash-Flow Example
Year
1
Gross Debt
106,816
Net Cash
-3,685
Net Profit
-4,261
5
10
15
118,602
137,680
148,622
6,846
7,437
12,294
1,427
348
2,165
20
25
30
35
126,255
70,219
19,813
2,649
18,693
18,024
8,580
1,335
1,989
1,066
1,691
364