Portfolio Choice in Retirement - What is the Optimal Home Equity Release Product?
34 Pages Posted: 19 Jun 2013
Date Written: June 18, 2013
We study the optimal product choice of home equity release products from the homeowner’s perspective in the presence of longevity, long-term care, house price, and interest rate risk. The individual can choose to buy annuities, long-term care insurance, and release home equity using reverse mortgages or home reversion plans. The individual enjoys utility gains from having access to either one of the two equity release products. Higher utility gains are found for the reverse mortgage as its product features allow for higher lump-sum payouts. When given a timing choice, the individual chooses to unlock home equity early in retirement. These key results emerge consistently across a range of cases with different parameter values. The availability of a government-provided LTCI does not change the use of equity release products significantly, but does change the demand for annuities.
Keywords: retirement, home equity release, reverse mortgage, home reversion plan
JEL Classification: D14, D91, G11, R20
Suggested Citation: Suggested Citation
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By Andrew Ang