SAFE Working Paper No. 293

When Should Retirees Tap Their Home Equity?

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.