Reserve mortgages allow consumers to take loans against their real estate assets to bridge the gap in their retirement income – either in the form of a lump sum or monthly payments. Just like regular mortgage schemes, reverse mortgage loans involve borrowing against the equity of real estate properties. In the case of reverse mortgages, however, the loan is covered by the property itself and only has to be repaid when the homeowner passes away or moves out. As alternatives to this borrowing scheme, consumers can also sell their homes and opt for a scheme that combines a lifetime right to live in the property and a life annuity. “Especially for households that spent most of their savings on buying a home and less on a private pension plan, reverse mortgages can provide a way out of this difficult situation,” explains Karolin Kirschenmann, researcher at ZEW Mannheim and co-author of the study.
Market potential could increase
In order to measure the market potential of reverse mortgages, the ZEW researchers used, for instance, data from the Socio-Economic Panel (SOEP). As the study shows, there are approximately six million households over 65 years who own their home outright without a mortgage. Around 420,000 of these households stated to be dissatisfied with their income. In addition, the team of researchers took into account the minimum requirements set by the providers of these financial products in the past so as to capture the market potential of reverse mortgages. To qualify for a reverse mortgage, the property in question must have a market value of at least 250,000 euros, which is the case for around 90,000 homeowners. Out of these households, approximately 42,000 reported that they do not hold additional assets that could help them improve their income situation.
This self-assessment regarding the financial satisfaction of the respondents was complemented with objective financial information to achieve a better picture of the market potential of reverse mortgages. On the basis of SOEP data, the ZEW researchers found that while there are 200,000 households that have real estate equity, their monthly income lies below the official poverty line of 13,200 euros per year.
“The market for reverse mortgages is still relatively small, but we see considerable potential for growth. This would not only benefit those households that are facing the risk of old-age poverty and require additional income – wealthier households could also optimise their retirement and inheritance planning by opting for reverse mortgages,” says ZEW economist Kirschenmann. The question of whether Germany can realise this market potential will, however, require more financial literacy among consumers and further marketing activities by financial service providers.
Why is the market underdeveloped?
According to the ZEW researchers, the lack of demand for reverse mortgages is, amongst other things, due to the complexity of the product. Consumers have little trust in this unfamiliar product. Moreover, the surveyed households reported that they have a strong emotional attachment to their homes.
Interviews with financial experts show that providers are also sceptical towards reverse mortgages, mainly due to risk considerations. For instance, providers have to take the so-called longevity risk into account: If the borrower lives for a long time, this extends the date of a potential property sale into the indefinite future. In addition, providers must keep in mind price risks, since the value of the property can be highly volatile. A final point of concern for the surveyed experts are reputational risks, as market changes or a lack of financial planning could put the providers in a position where they have to force elderly residents out of their homes.
“Financial service providers are reluctant towards reverse mortgages due to the numerous risks associated with them,” states ZEW researcher Kirschenmann. “But most of these risks are manageable. However, legislators will have to take action and put in place a clear legal framework for reverse mortgages. Otherwise, their market potential will remain untapped.”