Equity Release Schemes on Selected Housing Loan Markets Across the World

Abstract

The development of new financial instruments enables banks not only to expand the scope of their services, but also to reduce their business risks to some extent. The loan portfolio diversification is one of the main methods used to disperse and reduce the loan risk, mitigating the potential adverse effects of the bank capital allocation.

In the face of the recent years’ economic crisis, the strategy of diversification is becoming a matter of particular importance. Many high-risk products can be found in banks’ loan portfolios. Therefore today, to ensure the financial stability, it seems necessary to seek safer instruments that will not only provide a satisfactory income to banks, but will also enable them to compensate for losses generated by other risky sources. The reverse mortgage, offering seniors supplementary funds in the form of monthly proceeds based on the property ownership transfer to the lender after the borrower’s death may become such an instrument.

Reverse mortgage products have been available across the world for many years now. They cannot be offered in Poland, due to the absence of relevant legal regulations, thereby remaining little known to the public and even to some of the institutions operating on the financial services market. Nevertheless, the situation may change owing to a draft law being worked on by the Ministry of Finance, its purpose being to enable banks in Poland to include an instrument of this type in their product range.

However, the reverse mortgage may encounter a great number of barriers to entry in Poland. It is a matter of concern whether the product would appear interesting to customers, considering the demographic situation in the country, as well as the existing economic and social determinants. What is more, the reverse mortgage concept is a very controversial subject here, as it is not permitted by many of the regulations in force.

The principal purpose of the paper is to define the possibilities of the reverse mortgage development in Poland, as well as to analyse the chances for introducing this type of a product to our market based on the experience of selected countries of the world.

Keywords: equity, loan, mortgage

JEL Classification: L50, E40