Reverse Mortgages as Retirement Financing Instrument : An Option for Ã¢â‚¬Å“Asset-rich and Cash-poorÃ¢â‚¬Â Singaporeans
AbstractThe unique way of financing housing through the mandatory savings system in Singapore has created a class of asset-rich and cash-poor Singaporeans. This paper provides a framework to assess the viability of a reverse mortgage (RM) market so that such instruments may be harnessed as a source of financing retirement income for home owners. Based on different cost of capital, we estimate the probability of loss for both the private supplier and public provider of RMs. The probability of loss is computed by three major components : choice of replacement ratio and property growth rate; forecast of cohort survival probability by joint-life; and generation of yield curves to discount the future cash flows. The stochastic forecast of survival probability is estimated using the Lee-Carter demographic model based on the abridged life tables. The discount factor for future cash flows are generated from stochastic interest rates. Our simulation results indicate that based on the benchmark scenario, RM instruments by private providers are likely to achieve about 50% replacement ratio for the 4-room public housing owners. However, the market may be missing if a replacement ratio of 70% is required.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22566.
Date of creation: Jan 2005
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replacement ratio; probability of loss; risk free interest;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
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