Download - 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