Reverse Mortgage and Financial Sustainability

Abstract

This paper analyzes the effects that contracting a reverse mortgage has on the finances of families of a country or group whose members who aged 65 or older are the sole owners of the 100% of the property, regardless of the receipt of a retirement pension. For this purpose, an economic-financial model based on the life cycle model is defined, which considers a double source of randomness: mortality and dependence of family members. Long-term effects are measured using probabilistic, temporal and monetary indicators. For each country, the model must be adapted according to the legal framework for retirement and long-term care benefits and for the actuarial mortality and long-term care tables. As an illustration, this model was applied on Spanish families using data from the Spanish Survey of Household Finances 2017. The results obtained indicate that a family in Spain that meets the conditions for contracting a reverse mortgage sees, on average, an increase in its initial income and a decrease in both its probability of having liquidity problems in the future and the value of this lack of liquidity. It is also concluded that family composition influences the magnitude of these positive effects.

Valuation of Reverse Mortgages in the Spanish Market for Foreign Residents

“…Therefore, the actuarial approach is also an appropriate option, as suggested in the literature (Cho et al, 2015). Nevertheless, other ways of calculating reverse mortgages can be used, for example, from a financial point of view (Debón et al, 2013;Boj et al, 2022).…”

“…This fact is mainly attributed to the deep culture in favour of bequest, as noted by Costa-Font (2013) in a telephone survey. Other factors affecting the number of reverse mortgage contracts include the loss of house value, longevity risk resulting from people living longer than expected, high interest rates and expenses, risk aversion, and reputational risk, among others, as noted in different studies, see, for instance, Wang et al (2008), Yang (2011), Barrieu et al (2012), Fornero et al (2016), and Boj et al (2022).…”