Investigating reverse mortgage impact through life-cycle model: focus on the Italian system

As a consequence of the remarkable increase of the aging population in Eu- ropean countries, financial planning and portfolio choices of the elders have drawn the attention of policy makers and economists. Additionally, the insur- ance instrument market’s role in supporting the elderly has been underlined by both the growth of house rich-cash poor retirees and high costs for medi- cal care. In this context, reverse mortgages may be useful devices to reduce elders’ consumption and to alleviate pension systems’ pressure. The reverse mortgage (RM) contract allows elder homeowners to borrow money using their home as security for the loan maintaining the right to live in the house. The debt is repaid by the heirs when the borrower moves out or dies. The non-negative equity guarantee ensures that the exceed of the proceeds of the sale of the property is intended for heirs. The lack of demand for this type of product in the Italian market is well documented. In this work, we study the decision problem of elders’ in order to find optimal choices between contracting or not a RM contract. The analysis is based on retirees life-cycle model, which enables to describe a dynamic stochastic environment in pres- ence of long-term care expenses, house maintenance costs, longevity risk and house price risk. In order to capture uncertainty about lifespan and state of health, we rely on transition probabilities between different health states. Our model allows to explore the consequences of retirees’ emotional attachment to the property, which results to be the main reason of the market failure of this type of product. We find out that elders do receive higher utility gains when contracting a reverse mortgage, therefore it actually provides a valid financial support. Our conclusion may be used to define new policy indication and better commercial communication that can enhance RM contract’s appeal to aging population.