Equity release mechanism: Reverse mortage with tenure payments

Specialeforsvar: Per Bruno Schmidt Hansen

Titel: Equity release mechanism: Reverse mortage with tenure payments

Abstract: For most people, residence constitutes a significant part of the saved wealth. Elders is no exception, and are often characterized as ’house-rich cash-poor’, with a significant portion of their wealth tied up in real estate. The purpose of this thesis is to explore the potential role of reverse mortgages, as an equity release mechanism, to alleviate financial strain or enhance economic wealth among elders. We seek to provide insights into the effectiveness of this financial instrument in reducing the impact of exogenous factors (e.g. inflation) or/and contribute to added pension. We will study the main risks associated with a reverse mortgage contract, using relevant input for mortality, house prices, and interest rate, and analyze how the product behaves, both from the borrowers point of view, but also from the lenders (insurance company) perspective. A sensitivity analysis is performed to show how and what effect raising or lowering the different parameters in our framework has. In addition, a new termination model is introduced, in which multiple modes of termination are included, describing a more realistic setup.

Vejleder: Jesper Lund Pedersen
Censor:   Bjarne Astrup Jensen, CBS