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