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Cause (2) Taskforce Verzilveren: Tax assessed value -/- Outstanding mortgage debt
Citation preview
Home equity conversion
The role of home equity in financing the costs of an ageing society
Cause
• Elderly ‘equity rich, cash poor’ increase income elderly
• Increasing costs ageing society role home equity covering costs
Cause (2)
Taskforce Verzilveren:Tax assessed value
-/- Outstanding mortgage debt
(Int.) Literature
• Varying results w.r.t. potential of home equity (focus on individual wellbeing)Mayer & Simons (1994; +)Venti & Wise (1991; -)
• Clear w.r.t. reluctanceVenti & Wise (2001)Elsinga et al. (2010)
(Int.) Literature (2)
• Reluctance HE conversion irrational?- liquidity home equity- bequest motives- mental accounting- complexity financial products
Setup study
• Focus on staying in current dwelling• Focus on replacing risks from individual to
investors
Home equity conversion
Investor Seller
Bank
€
€
€Bank/Insurer
Home equity conversion (2)
2012
Owner Renter
65
€
€
Insurer
Investor€
Central question:
Does home equity conversion result in a significant additional income for the converting household?
AssumptionsValuation occupied dwelling Annuity payment Cost of owning prior to
conversion
Rent 5,50% Acquisition costs annuity
€ 500 Mortgage interest
3,90%
Maintenance 0,75% Annual fixed cost € 100 Ownership tax 0,10%
Management 0,60% Return Risk freea Insurance 0,10%
Discount rate 6,00% Margin 2,50% Attributed rental income tax (Woningwaarde-forfait)
0,60%
House price development
2,00% Payment term Mortality table
Marginal income tax rate
24/42%
Development of costs
2,50%
Remaining time occupation
Mortality table
Results
Taks assessed
value
Mortgage debt Capital insurance (kapitaalverzekering)
Home equity
50 <= x < 55 298 170 17 145
55 <= x < 60 297 149 15 163
60 <= x < 65 303 122 9 191
65 <= x < 70 302 102 5 205
70 <= x < 75 314 74 1 242
75 <= x < 80 310 58 1 254
x >= 80 302 46 1 256
Total 303 117 9 195
Figures x € 1.000
Results (2)
Results (3)
Results (4)
Results (5)
Results (6)
Results (7)
Results (8)
Conclusions
• Home equity conversion potentially interesting for individual households
• Home equity conversion does not offer a fundamental basis for long-term additional income for society at large