Reverse Mortgages for Retirement Planning in Germany Rather Unpopular

Reverse mortgages, which can be used to borrow on debt-free real estate in old age to improve one’s pension, have not yet become established in Germany – unlike in the USA and Great Britain. Also for the future, financial market experts expect reverse mortgages to increase only slightly in importance as an instrument for old-age provision in Germany. The high emotional value of the property is what mainly inhibits the demand for reverse mortgages. For mortgage providers, by contrast, the primary obstacle is the difficulty of estimating the lifespan of property owners. These are the key results of the analysis of the special question in the monthly ZEW Financial Market Survey, which was carried out by the ZEW – Leibniz Centre for European Economic Research, Mannheim, in July 2019.

Reverse mortgages allow relatively old borrowers to unlock the value of their real estate and turn it into monthly payments provided by the lender. Interest and redemption payments are only being repaid from the proceeds of the real estate at the end of the contract, i.e. at the real estate owner’s death or when he or she is moving to a nursing home. Until then, the respective borrowers will remain owners and residents of the property. The results of the special question of the ZEW Financial Market Survey show that less than 30 per cent of those surveyed expect a strong or very strong increase in the significance of reverse mortgages as a retirement provision instrument in Germany, while around 45 per cent expect no or only a slight increase in significance.

From the experts’ point of view, the demand for reverse mortgages is inhibited above all by the high emotional value of the property, with 88 per cent of respondents seeing this as a strong or very strong obstacle. In addition, 79 per cent of the experts cited comprehension problems due to the complexity of the decision as a reason for the limited popularity of reverse mortgages. The costs of reverse mortgages, by contrast, is the only factor to have little impact on potential demand in the future. The need for reverse mortgages due to a lack of household liquidity is also estimated to be rather low.

According to the financial experts, there are three main factors on the supply side that inhibit the acceptance of reverse mortgages: Besides the difficult estimation of the lifespan of the property owners (65 per cent), uncertainty about how the owner will maintain the property in future (53 per cent) and the risk that mainly customers with a very long lifespan will acquire reverse mortgages (50 percent) limits the offer. Refinancing is generally regarded as unproblematic by the experts.

“The results clearly show that reverse mortgages as an instrument for old-age provision are not considered to be very significant. It is therefore not surprising that only around ten per cent of the companies in which the participants of our Financial Market Survey are employed discuss the implementation of such a product,” explains Dr. Karolin Kirschenmann, deputy head of ZEW’s Research Department “International Finance and Financial Management” and co-author of the study. “Our results show that owners are guided primarily by emotions when deciding whether to use their property as a means of retirement provision.”

For the ZEW Financial Market Survey, up to 200 experts from banks, insurance companies and the finance departments of selected large companies are surveyed on a monthly basis regarding their assessment and expectations of important international financial market data.