Reverse Mortgages

Housing Studies of Harvard University: PROJECTIONS & IMPLICATIONS FOR HOUSING A GROWING POPULATION

The population of older Americans is growing and will continue to grow for the next two decades. By 2035, it is projected that one out of every three households in America will be headed by someone age 65 or older.

But among the older adults, the percentage of those with low incomes will grow. In 2015, 15 million older adults earned less than 80% of their median incomes. By 2035, that number will increase to 27 million, according to a recent report from the Joint Center for Housing Studies of Harvard University titled. Projections & Implications for Housing a Growing Population: Older Households 2015-2035.

The number of low-income seniors as well as the increase in need for accessible housing means older adults will need to find other ways, aside from traditional retirement savings, to make ends meet in retirement.

One option is to take out a reverse mortgage, the report suggests. This option will be viable as a solution because Americans—and baby boomers in particular—carry large amounts of home equity after years of paying off their traditional mortgages. Also, people overwhelmingly wish to age in place, which means the home is expected to increasingly become the site of long-term care.

There are a couple of key reasons why the Joint Center for Housing Studies points to tapping home equity as a viable retirement option.

1. Retirees will have plenty of home equity

Older Americans who own homes will have a leg up when it comes to options for tapping into other sources for retirement income. The typical older homeowner has 42 times more wealth than the typical older rental household, The Joint Center for Housing Studies reports.

Older homeowners who are struggling to make their monthly mortgage payment after retiring and who are not tapping into their home equity could be missing out on a valuable safety net in retirement.

As of 2014, 9.3 million older households over the age of 65 were paying at least 30% of their income toward housing, but if a home equity conversion mortgage was taken out, that 30% could be put towards other payments that come along with aging.

“For those with mortgages they cannot afford but who still have substantial home equity, reverse mortgages may make it more financially feasible to age in place,” the report says.

The proceeds from a home equity conversion mortgage can be used for a number of costs in retirement, such as home renovations, medical bills, credit card debt, in-home care or even as a rainy day fund to use for traveling in retirement.

2. Most people want to age in place

Most older adults want to age in place but to do so effectively, there needs to be a lot of thought put into how to manage costs after retiring.

Nearly 70% of older adults will need some form of long-term care in their lives and the majority will be provided in the home, the report found. But with a home equity conversion mortgage, borrowers can use the loan’s proceeds to pay for that long-term care, which can help diminish the financial burden.

A home equity conversion mortgage gives homeowners the opportunity to stay in their home for the rest of their lives as well as eliminates a monthly mortgage payment. The homeowner will however still be responsible for keeping up on taxes, insurance and other payments to keep the home in good shape.

“There are opportunities for tomorrow’s older adults to enjoy a higher quality of life than their predecessors by taking advantage of new housing forms, innovative interior features, advanced technology, and new health care delivery systems,” the report says. “Yet the financial challenges set to mount in the next decade and physical challenges ramping up after that as the baby boomer population moves into their 80’s and beyond, we must begin to act now if that promising future is to be shared by all of America’s older adults.”

Pensioners released a record £2.1bn of property wealth in 2016, new figures have revealed.

A market monitor from over-55s finance specialist Key Retirement found that the total value of property wealth released in 2016 grew 26% on the previous year, marking the fifth consecutive year of growth for the equity release market.

The equity release sector has now more than doubled in size since 2011.

Dean Mirfin, technical director at Key Retirement, said: “…Property wealth is making a huge contribution to retirement planning.

“Rate cuts across the market and the launch of new solutions demonstrates that the market is responding to the growing need for alternatives to traditional retirement income solutions which are being squeezed by historically low interest rates.”

During 2016, the number of homeowners using equity release to boost their retirement finances rose 17% to 27,666.

Seven out of 12 regions in the UK reported growth in the value of equity released, with East Anglia and London experiencing a 67% and 43% increase respectively.

Homeowners in the capital released on average £142,999 at an LTV of 23%.

Meanwhile, the average retired homeowner in the UK accessed £77,877 from their property, up 8% on the previous year.

Some 22% of customers put these funds towards mortgage repayments.

“The average amount being released by retired homeowners at nearly £78,000 underlines that property wealth can help with a number of issues for customers, ranging from improving their homes and going on holiday to helping family and clearing debt,” Dean added.

“…With 2017 being the start of the first major wave of interest only mortgage maturities, we expect demand from those with a shortfall to repay the capital, or no means at all, to turn to equity release as a solution which will further drive demand.”

House prices in England have grown to almost 10 times the size of the average pensioner’s yearly income over the past 20 years, findings from the Equity Release Council reveal. Analysis of Office for National Statistics data between 1994/5 and 2014/5 showed that the average house price in England has rocketed by 148% from £82,100 to £203,360. Despite such gains, pensioner household income rose by just 66% in comparison to total £21,026 a year in 2014/15.

Events like the 2008/09 financial crisis have meant that growth in house prices relative to pensioner income has not been linear, the research showed. House prices in the mid-2000s were almost 12 times higher than the average pensioner income, before narrowing to 9.4 times in the aftermath of crisis.

Nigel Waterson, chairman of the Equity Release Council, said the findings had “game-changing” implications for the use of housing equity to fund their retirement.

“While the growth in house prices has not been linear or universal, strong market fundamentals mean housing equity is likely to remain a sizeable asset for the foreseeable future. It means housing wealth has an indispensable part to play in all discussions home owners have about financial well being in retirement,” he said.

“Government must act to encourage people to think through their options holistically, rather than focusing exclusively on savings and overlooking other choices that could boost their prospective retirement income.”
House prices have also outpaced the growth of pensioner investment income which has fallen 20% over a 20-year period, state pension income which has risen 59% and income from private pensions/annuities which has recorded growth of 114%.

Waterson added that the significant growth in house prices meant many pensioners who own their home have been effectively investing in an asset which could boost their income for later life.
He said: “With economic turbulence affecting investment returns and putting government finances under added pressure, housing equity is likely to be an increasingly important source of income for pensioners for years to come.”