A seminar by Katja Hanewald from UNSW
Title: Optimal Use of Housing Wealth in a Two-Generation Model
Abstract: This article studies the potential benefits of reverse mortgages for multi-generation financial planning. Our study extends beyond previous research that only considered the optimal use of reverse mortgages by individual retirees or couples. We develop a new multi-period simulation model that considers the welfare gains of parents and their adult children, house price risk, interest rate risk, uncertain long-term care cost and public pensions. The model compares two approaches to intergenerational wealth transfers: bequests and gifting. We apply the model to housing wealth decisions in Australia. Our results show that most household types could enjoy welfare gains from using a reverse mortgage to supplement the parent’s retirement income and fund the down payment for a home to a child. However, customer data from a major Australian reverse mortgage lender reveals that gifting is not a common practice yet. This presents an opportunity for reverse mortgage providers internationally to increase awareness of the ‘gifting function’ of reverse mortgages, potentially addressing the low demand for these products.
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