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THE ROLE OF A REVERSE MORTGAGE IN PENSION SECURITY

This article discusses the role of reverse mortgage as a form of pension security. It explores the different models of equity release schemes available in the market and highlights their criteria. It also examines the various ways to receive payments from a reverse mortgage loan. The article concludes by emphasizing the need for additional pension benefits in the Polish market and suggests that pensioners in big cities should consider using reverse mortgage as a means of maintaining their standard of living. It also suggests that banks should prepare suitable offers for reverse mortgage.

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THE ROLE OF A REVERSE MORTGAGE IN PENSION SECURITY

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  1. THE ROLE OF A REVERSE MORTGAGEIN PENSION SECURITY Patrycja Kowalczyk-Rólczyńska Wroclaw University of Economics, Poland

  2. Reverse Mortgage as a form of pensionsecurity Reverse mortgage is a financial product which is a form of Equity Release Schemes. Under the requirements of the European Commission, for a service to be classified as an Equity Release Scheme (ERS), it must meet the following criteria: • be a financial service, • be a source of liquidity for the future, • contain a strong entitlement to remain in occupation of the property, • rely solely on the sale of the property for repayment/payment of the funds released to be used as a retirement pension

  3. There are two models of ERS arrangements available on the market: • the sale model, • the loan model. The sale model involves the sale of the property to a third party, with additional provision of the right for the previous owner to remain in occupation (home reversion). The loan model is a form of mortgage-secured loan, with repayment made from the proceeds from the eventual sale of the property on the death of the homeowner or after the property has been vacated for a specified period of time. In this model, the right to fixed property is transferred to the crediting institution only after the final demise of the borrower

  4. Austria, Finland, France, Sweden and Italy offer only the loan model. Netherlands, Bulgaria and Romania offeronly the sale model. Both models occur in Ireland, Spain, Germany and Hungary. In Poland: • The sale model isoffered by: Fundusz Hipoteczny DOM, Fundusz Hipoteczny Familia SA and others. • The loan model should be offered by banks (according to ReverseMortgageAct).

  5. On the worldmarket there are multiple ways to receive payments fromReverseMortgageLoan (RML): • a tenure RML, where borrowers receive a fixedmonthly amount as long as one of theborrowers lives in the house, • a term RML, where borrowers receive a fixed amountfor a fixed length of time, • a line of credit, which allows borrowers to withdrawflexibly, up to a limit, during a predetermined drawing period, • modifiedtenure and modifiedterm options combine the line-of-credit RML with tenure and term features, respectively.

  6. The annual value of fixed-term benefit received in advance by the person in x age: - the sum of the reverse mortgage granted, as percentage of the market value of the property at the date of the signing of the agreement - discountingfactor - probabilityof survival by a person in x age of further kyears

  7. Monthly pension gap for selectedprovinces in Poland

  8. Conclusion • AdditionalpensionbenefitsarenecessaryinthePolish market • In big citiespensionersshouldconsiderusingreversemortgage as a pension security (benefits from reversemortgageallowkeepingup the same level of life) • Banks shouldpreparesuitableoffers

  9. Thankyou for yourattention

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