Risk Analysis for Reverse Mortgages with Different Payout Designs
Cho Daniel (),
Katja Hanewald () and
Sherris Michael ()
Additional contact information
Cho Daniel: Swiss Re, Sydney, New South Wales, Australia
Sherris Michael: School of Risk and Actuarial Studies, University of New South Wales, Sydney, New South Wales, Australia
Asia-Pacific Journal of Risk and Insurance, 2015, vol. 9, issue 1, 77-105
We analyze the risk and profitability of reverse mortgages with lump-sum or income stream payments from the lender’s perspective. Reverse mortgage cash flows and loan balances are modeled in a multi-period stochastic framework that allows for house price risk, interest rate risk and risk of delayed loan termination. A vector autoregressive (VAR) model is used to simulate economic scenarios and to derive stochastic discount factors for pricing the no negative equity guarantee embedded in reverse mortgage contracts. Our results show that lump-sum reverse mortgages are more profitable and require less risk-based capital than income stream reverse mortgages, which explains why this product design dominates in most markets. The loan-to-value ratio, the borrower’s age, mortality improvements and the lender’s financing structure are shown to be important drivers of the profitability and riskiness of reverse mortgages, but changes in these parameters do not change the main conclusions.
Keywords: reverse mortgage; income stream; equity release; vector autoregressive model; stochastic discount factor; risk-based capital (search for similar items in EconPapers)
JEL-codes: G12 G21 G32 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
For access to full text, subscription to the journal or payment for the individual article is required.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bpj:apjrin:v:9:y:2015:i:1:p:77-105:n:4
Ordering information: This journal article can be ordered from
Access Statistics for this article
Asia-Pacific Journal of Risk and Insurance is currently edited by Michael R. Powers
More articles in Asia-Pacific Journal of Risk and Insurance from De Gruyter
Bibliographic data for series maintained by Peter Golla ().