There is a considerable potential for growth in the market for reverse mortgages in Germany because of the enormous real estate wealth held by older individuals. This is the conclusion of a survey of 170 financial market experts conducted by the Centre for European Economic Research in Mannheim (ZEW) in its monthly German Financial Market Survey, undertaken in collaboration with the mortgage provider ImmoKasse GmbH.
Reverse mortgages enable owner occupiers of private dwellings to purchase a mortgage and pay it back with the value of their property. This allows older homeowners with a low income to significantly supplement their monthly income or pension. During the term of the mortgage contract, the borrower retains ownership of the property and continues to live in the home. In contrast to a standard mortgage, with reverse mortgage products the interest and amortisation costs are deferred until the end of the contract. The costs of the mortgage are only paid following the death of the borrower, at which time they are settled against the value of the property, or earlier, if the owner moves into a retirement home or sells the property. No additional collateralisation or security from other property or assets are provided.
According to the opinion of the experts surveyed by the ZEW, the most significant hindrance to more wide spread use of this new financial product in Germany is that consumers are scarcely aware or informed about its existence or function. With more than four million homeowners in Germany who are 60 years of age or older, there is a large potential pool of customers for reverse mortgage products. The market is just beginning to take shape in Germany, however. Within Europe, there is already a well established market for reverse mortgages in the UK, and rising demand is currently being witnessed in Spain, Sweden, Finland, France and – most recently – in Germany.
Reverse mortgage products are especially attractive for individuals who have low income levels, but are homeowners. Real estate represents 80 percent of the assets of Germans 65 years of age and older.
According to the experts, the great obstacle to the acceptance of reverse mortgage products is a lack of understanding among the public as to their function. Domestic consumers have no experience with this new product. An additional obstacle cited by the experts is that German property owners often wish to pass their property along to their heirs without encumbrances or debts. In the case of a reverse mortgage, the heirs have a choice: they may keep the property and pay off the mortgage as a conventional mortgage annuity loan, or they may sell the property themselves. Alternatively, they may choose to turn the property over to the bank so it may dispose of it. Under no circumstances are the heirs liable for payment of the excessive indebtedness of the estate.
On the side of lenders, the risk of extreme client longevity is a significant factor, and one that has held back financial service providers from offering reverse mortgage products until now. The experts, however, do not feel that estimates concerning long-term price trends in the real estate market are a significant obstacle for the successful introduction of reverse mortgage products.
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