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Explaining why, right or wrong, (Italian) households do not like reverse mortgages

  • Elsa Fornero

    ()

    (University of Turin, CeRP-Collegio Carlo Alberto and Netspar)

  • Maria Cristina Rossi

    ()

    (University of Turin and CeRP-Collegio Carlo Alberto)

  • Maria Cesira Urzì Brancati

    ()

    (University of Tor Vergata and CeRP-Collegio Carlo Alberto)

According to economic theory, elderly homeowners should be much more eager than they actually are to adopt financial instruments allowing them to borrow against home equity. This paper investigates the determinants of interest for the Italian elderly in one such instrument, the reverse mortgage. We draw from a unique dataset, UniCredit’s 2007 survey on household savings, and use a discrete choice model (ordered probit) to perform our empirical analysis. Out of 1,200 respondents, roughly 60% claimed to have no interest in the product, while the remaining 40% expressed various degrees of appeal, from quite low to very high. Three main findings emerge from our analysis: first, homeowners who are prepared to sell their home are more likely to be interested in the product. Second, respondents perceive reverse mortgages as personal debt, even though the burden of repaying the loan lies with their heirs, and debt aversion predicts low interest. Third, homeowners who are more concerned about their standard of living in retirement are more likely to be interested in the product. We find, however, no conclusive evidence supporting our a priori notion that greater financial literacy is a predictor of higher interest in RMs.

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File URL: http://fileserver.carloalberto.org/cerp/WP_123.pdf
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Paper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 123.

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Length: 28 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:crp:wpaper:123
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  1. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," Economics Working Papers ECO2008/31, European University Institute.
  2. Chiuri, Maria Concetta & Jappelli, Tullio, 2008. "Do the elderly reduce housing equity? An international comparison," CFS Working Paper Series 2008/20, Center for Financial Studies (CFS).
  3. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
  4. Viola Angelini & Anne Laferrère, 2012. "Residential Mobility of the European Elderly," CESifo Economic Studies, CESifo, vol. 58(3), pages 544-569, September.
  5. Mitchell, Olivia S. & Piggott, John, 2004. "Unlocking housing equity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 18(4), pages 466-505, December.
  6. Elsa Fornero & Chiara Monticone, 2011. "Financial Literacy and Pension Plan Participation in Italy," CeRP Working Papers 111, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  7. Albert Ando & Luigi Guiso & Daniele Terlizzese, 1993. "Dissaving by the Elderly, Transfer Motives and Liquidity Constraints," NBER Working Papers 4569, National Bureau of Economic Research, Inc.
  8. Steven F. Venti & David A. Wise, 1989. "Aging, Moving, and Housing Wealth," NBER Chapters, in: The Economics of Aging, pages 9-54 National Bureau of Economic Research, Inc.
  9. Hui Shan, 2011. "Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(4), pages 743-768, December.
  10. John V. Duca & Anil Kumar, 2011. "Financial literacy and mortgage equity withdrawals," Working Papers 1110, Federal Reserve Bank of Dallas.
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