A two-generation model with altruism for reverse mortgage demand

Reverse mortgage markets remain small internationally, with bequest motives frequently cited as a key reason. We develop a new two-generation lifecycle simulation model to study the role of reverse mortgages in intergenerational financial planning, particularly as a tool for families to bring forward bequests. The model incorporates parental altruism by assuming parents derive utility not only from their own consumption and housing but also from their child’s current and future financial well-being. This extends traditional bequest models, which typically consider only the wealth transferred at death. The model accounts for house price risk, interest rate risk, investment risk, wage growth, health shocks, long-term care costs, private pensions, and means-tested public pensions. Using this framework, calibrated to Australian economic and policy settings, we compare the welfare gains from bequests and early bequests (inter vivos gifts) for homeowning parents and adult children seeking to purchase their first home. The results suggest that families across a range of wealth levels can experience substantial welfare gains when the parent uses a reverse mortgage both for retirement income and to gift the adult child a first home deposit. Early bequests funded through reverse mortgages increase overall family welfare compared to preserving home equity for a bequest or using a reverse mortgage solely for the parent’s consumption, particularly for middle-wealth households. A policy experiment shows that gifting limits reduce welfare gains for some families, but have a small overall impact. These findings suggest that policies encouraging informed use of reverse mortgages could improve intergenerational financial security.