Portfolio Choice in Retirement – What is the Optimal Home Equity Release Product?
This report study the optimal product choice of home equity release products from the homeowner’s perspective in the presence of longevity, long-term care, house price, and interest rate risk.When given a timing choice, the individual chooses to unlock home equity early in retirement. These key results emerge consistently across a range of cases with different parameter values.
Markets for equity release products exist in numerous countries including the United States, the UK, Australia, Canada, New Zealand and several countries in the European Union. Home equity release contracts differ substantially in the way house price risks, interest rate risk and longevity risk are shared between the homeowner and the lender. The two main forms of equity release are mortgage schemes (‘loan model’) and reversion schemes (‘sale model’) (see, e.g., Hosty et al., 2008; Reifner et al., 2009a). Reverse mortgages are the most common products internationally and also dominate the U.S. market (Consumer Financial Protection Bureau, 2012). Home reversion has existed for a long time in the form of private arrangements, for example in France, Portugal and Poland (Reifner et al., 2009b). Commercial home reversion is available, for example, in Australia, France, Finland, New Zealand and the UK. Reflecting those market conditions, we model a retiree’s choice between a reverse mortgage and a
home reversion plan.