Reverse Mortgage in Italy: Life-Cycle Theoretical Approach vs Empirical Evidences

Introduction

The recent increase in life expectancy, while reflecting improvements in living standards, implies long retirement periods, high long-term care expenses and pressure on the pension system. The elderly often hold valuable real estate assets but lack the liquidity to face the demands of consumption needs and medical expenses (house-rich and cash-poor). In this framework, Reverse Mortgage (RM) may constitute a valid financial support: it allows elder homeowners to borrow money against their home while maintaining the right to live in it. Upon the borrower’s death, heirs must repay the debt, and the non-negative equity guarantee ensures that the exceed of the proceeds of the sale of the property is transferred to the heirs. Despite its availability in Italy, RM remains relatively underutilized. In this study, we provide useful insights into the Italian RM market and investigate the reasons behind its limited adoption.

Methods

We present a twofold analysis. First, we construct a life-cycle model to evaluate the borrower’s decision problem, taking into account long-term care expenses and house maintenance costs. Exploiting a dynamic programming technique, we establish the optimal saving streams with and without RM. We then perform a comprehensive quantitative analysis conducted among potential Italian subscribers to assess current levels of awareness and to identify the factors hindering access to this credit line.

Results

The life-cycle model approach shows that elders receive higher utility gains when using RM. Under three different health scenarios, the liquid wealth available in the case of RM was shown to alleviate the pressure on the elders’ savings. The survey results underline elders’ trust issues with respect to the institutions that offer RM. Product complexity and emotional attachment to the property are among the main factors hindering the development in the uptake of this option.

Conclusions

Our work highlights the main criticalities affecting RM in the Italian market and provides relevant policy indications to enhance the potentiality of this product.