The Psychology and Economics of Reverse Mortgage Attitudes: Evidence from the Netherlands

We find that among Dutch homeowners there is substantial potential interest in reverse mortgages, especially for the purpose of being able to live more comfortably and not worry about money until death, or to make a significant expenditure— on e.g. home improvements or traveling. Our regression results, based on rich survey data, indicate that interest depends positively on the ratio of housing wealth over income and on the perceived riskiness of future pensions, and negatively on the expected replacement ratio. We find that giving examples of using a reverse mortgage for the benefit of the homeowners’ (grand)children significantly raises interest in reverse mortgages of people with a bequest wish. We interpret this as evidence that people are unaware of the potential of reverse mortgages to optimize bequest timing. Confronting our results with a similar study among Italian homeowners, we conclude that while in Italy a reverse mortgage is primarily seen as a “last resort”, Dutch homeowners regard it as a potential retirement planning tool. However, a reverse mortgage is a relatively complicated financial product that entails certain risks and can be quite expensive. Rules and regulations concerning reverse mortgages should be in place, to prevent mis-selling. The government can play a role in providing safeguards for both borrowers and lenders, in order to support the development of a reverse mortgage market.