Opportunities and Limits of Reverse Mortgages

Special Question in ZEW Financial Market Survey: Reverse Mortgages in Germany

Reverse mortgages are a type of mortgage loan that allows homeowners to receive monthly payments based on the value of their homes while retaining ownership of the property and continuing to live in their homes. This is of particular benefit for pensioners who are given the opportunity to supplement their income during retirement. In contrast to regular mortgages, reverse mortgages allow older people to defer the interest or repayment rates of the loan. Upon the expiration of the contract, borrowers are paid out on the basis of the property value. Homeowners also have the option to repay the credit. First introduced in the United States, reverse mortgages are becoming more and more popular among US citizens. Nevertheless, the overall level of significance in the mortgage market remains low.

The markets in Canada, Australia and New Zealand are characterised by a high level of development. In addition to the well-established equity release market in the UK, reverse mortgage markets are taking shape all across Europe, with particularly high demand in Spain, Sweden, Finland and France.

Despite the fact that non-liquid real estate assets make up a considerable share of total assets in German households, there is no comparable programme in Germany. On average, real estate represents around 75 per cent of the financial assets of Germans 65 years of age and older. Among homeowners whose monthly income is less than 1,000 euros per household member, this share is even higher, with property assets making up 80 per cent of total wealth. Due to demographic developments as well as the increasing importance of private pension provision, it is likely that this financial product will come to play a more significant role in Germany.

In light of these developments, the Mannheim Centre for European Economic Research (ZEW) surveyed 232 financial market experts about the opportunities of reverse mortgages in Germany as part of the ZEW Financial Market Survey. The results of the survey indicate that this financial product is likely to become increasingly significant. More than 60 per cent of the financial experts surveyed expect reverse mortgages to gain slightly in importance, while around 20 per cent expect them to gain significantly in importance. Only a small minority of 11 per cent stated that they do not expect any changes with regard to the significance of reverse mortgages.

When asked about the obstacles to the widespread acceptance of reverse mortgage, the experts provided the following answers. On the side of lenders, around 49 per cent of the surveyed experts believe that a wider product portfolio could carry considerable risks regarding the use of the mortgaged property once the homeowner passes away. There are, however, greater obstacles to the acceptance of reverse mortgages on the demand side. The most commonly encountered reasons for the reluctance towards reverse mortgages were inheritance issues. More than half of the respondents named inheritance as an important or a very important impediment to the acceptance of reverse mortgages. Many survey participants also disliked the idea of calculating their life expectancy (49 per cent agreed strongly or very strongly) or cited a general distrust of potential providers as an important obstacle (43 per cent agreed strongly or very strongly).

Following this study, there will be another special question in the ZEW Financial Market Survey in November 2007, which will focus on the topic of reverse mortgages.

At the Mannheim Centre for European Economic Research (ZEW), researchers from the Research Department “International Finance and Financial Management” are investigating research questions regarding reverse mortgagea. In particular, their research focuses on the analysis of household structures, pension calculations and risk determination of various product versions as well as on the development of existing markets.

For further information please contact:

Dr. Gunnar Lang, Phone +49(0)621/1235-372, E-mail lang@zew.de

Dr. Peter Heindl, Phone +49(0)621/1235-146, E-mail heindl@zew.de