home equity conversion the role of home equity in financing the costs of an ageing society

Home equity conversion

The role of home equity in financing the costs of an ageing society

Cause

• Elderly ‘equity rich, cash poor’ increase income elderly

• Increasing costs ageing society role home equity covering costs

Cause (2)

Taskforce Verzilveren:Tax assessed value

-/- Outstanding mortgage debt

(Int.) Literature

• Varying results w.r.t. potential of home equity (focus on individual wellbeing)Mayer & Simons (1994; +)Venti & Wise (1991; -)

• Clear w.r.t. reluctanceVenti & Wise (2001)Elsinga et al. (2010)

(Int.) Literature (2)

• Reluctance HE conversion irrational?- liquidity home equity- bequest motives- mental accounting- complexity financial products

Setup study

• Focus on staying in current dwelling• Focus on replacing risks from individual to

investors

Home equity conversion

Investor Seller

Bank

€

€

€Bank/Insurer

Home equity conversion (2)

2012

Owner Renter

65

€

€

Insurer

Investor€

Central question:

Does home equity conversion result in a significant additional income for the converting household?

AssumptionsValuation occupied dwelling Annuity payment Cost of owning prior to

conversion

Rent 5,50% Acquisition costs annuity

€ 500 Mortgage interest

3,90%

Maintenance 0,75% Annual fixed cost € 100 Ownership tax 0,10%

Management 0,60% Return Risk freea Insurance 0,10%

Discount rate 6,00% Margin 2,50% Attributed rental income tax (Woningwaarde-forfait)

0,60%

House price development

2,00% Payment term Mortality table

Marginal income tax rate

24/42%

Development of costs

2,50%

Remaining time occupation

Mortality table

Results

Taks assessed

value

Mortgage debt Capital insurance (kapitaalverzekering)

Home equity

50 <= x < 55 298 170 17 145

55 <= x < 60 297 149 15 163

60 <= x < 65 303 122 9 191

65 <= x < 70 302 102 5 205

70 <= x < 75 314 74 1 242

75 <= x < 80 310 58 1 254

x >= 80 302 46 1 256

Total 303 117 9 195

Figures x € 1.000

Results (2)

Results (3)

Results (4)

Results (5)

Results (6)

Results (7)

Results (8)

Conclusions

• Home equity conversion potentially interesting for individual households

• Home equity conversion does not offer a fundamental basis for long-term additional income for society at large