Reverse Mortgage Schemes Financing Urban Dynamics Using the Multiple Decrement Approach

Abstract

The objective of this chapter is to introduce flexible reverse mortgage contracts and to consider them in a multiple decrement model. Here, the multiple decrement approach is applied for the first time in housing and urban planning as a new tool for better forecasting of the housing market and housing needs of senior citizens with decreasing functional capacities and therefore changing housing needs on their lifetime horizon. The presented approach enables development of appropriate, more flexible equity release schemes (ERS) than the products known up to now. In the flexible reverse mortgage model developed here we assume that the homeowner can always sell her/his residential property and buy the new residential property for the amount which is of the same value as that of the first house, or lower. It enables better management of cash flows related to the portfolio of residential properties in the context of ERS—the reverse mortgage approach. The schemes are designed to allow elderly homeowners to convert the equity in their homes to income and to keep the possibility to sell their property and move to a more appropriate dwelling under the same contract, which was not the case up to now. Namely, in these newly presented ERS products, homeowners can also keep the mathematical reserves for longevity insurance, based on the initial contract, when they move and sell the initial residential property and buy a new one. They also keep their deferred lifetime annuities if they finally sell the residential property and move to long-term care in a retirement home. In this new approach, the reverse mortgage schemes/longevity insurance are not tied to the single property as it is the case in the existing reverse mortgage products, but rather to the life of the senior homeowner. In the numerical examples, different cash flows associated with different paths of a graph are presented demonstrating the advantages of the flexible reverse mortgage. We show that not only the transaction costs are lower but also that the set of possible choices is larger. According to population aging in Europe, where in 2060 one-third of the population will be more than 64 years old, it is important also for the local authorities and spatial planners to study elderly people’s housing needs in order to design a housing system suitable also for them, and therefore to adopt the housing stock to the desired housing consumption. The housing needs of senior citizens may be satisfied if the housing stock is specifically designed to meet their physical, emotional, recreational, medical, and social needs. Recognizing that urban space must be adapted to meet these objectives, the paper will examine the issues regarding the sustainable financing of senior citizens and their changing housing needs in particular.