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When should retirees tap their home equity?

Hambel,Christoph
; 
Kraft,Holger
; 
Meyer-Wehmann,André
Abstract
This paper analyzes a household's optimal demand for a reverse mortgage. We study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. We find that the demand for reverse mortgages is particularly pronounced for cash-poor, house-rich retirees, and households with a strong bequest motive and low pension income. We analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. If there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Furthermore, the probability to take out a reverse mortgage is hardly affected unless her financial wealth is small.
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Funding Information: We thank Geert Bekaert (the editor), an anonymous associate editor, and three anonymous referees for their constructive comments. We also thank Anne Balter, Frank de Jong, Nikolaus Schweizer, and the participants of the QFAS Seminar at Tilburg University for valuable comments. We gratefully acknowledge financial support by the Leibniz Institute for Financial Research SAFE . Funding Information: We thank Geert Bekaert (the editor), an anonymous associate editor, and three anonymous referees for their constructive comments. We also thank Anne Balter, Frank de Jong, Nikolaus Schweizer, and the participants of the QFAS Seminar at Tilburg University for valuable comments. We gratefully acknowledge financial support by the Leibniz Institute for Financial Research SAFE. Publisher Copyright: © 2023 Elsevier B.V.
Date
2023-09
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Tilburg University Research Output Collection
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Keywords
Biometric risks, Consumption-portfolio decisions, Financial disasters, Reverse mortgage
Citation
Hambel, C, Kraft, H & Meyer-Wehmann, A 2023, 'When should retirees tap their home equity?', Journal of Banking & Finance, vol. 154, 106967. https://doi.org/10.1016/j.jbankfin.2023.106967
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https://hdl.handle.net/20.500.14602/79577
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