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EconPol Europe Policy Report: New Financial Instrument Could Improve Retirement Income for 90,000 German Households

Brussels, 27 April 2021:  Fully 90,000 households in Germany could benefit from a reverse mortgage to boost their retirement income. This is the finding of a study conducted by the EconPol research network. Demographic change is forcing many European citizens to consider a funded pension. With a reverse mortgage, real estate assets can be used to close a pension gap – either in the form of a lump sum payment or as monthly pension payments. This instrument is widely used in the US and the UK but is rare in Germany.

“Especially for those households who have invested almost everything they have in a home and have little in private retirement savings, a reverse mortgage can provide the way out of a difficult situation,” explains Karolin Kirschenmann, co-author of the study. As is the case with a traditional mortgage, the house serves as collateral for a reverse mortgage. The difference is that the loan amount comes due only when the owner dies or moves out. In addition to this credit model, consumers can sell their property and secure the right to continue living there for the rest of their lives with a guaranteed income.

In 2017, around six million German households over the age of 65 owned their property debt-free. Some 420,000 households in this group are not satisfied with their income. In calculating the potential of the reverse mortgage market, the economists considered only owners of properties worth at least EUR 250,000. While 90,000 of the households fall into this category, only about 42,000 of these have no other assets to improve their income situation.

“The market for reverse mortgages is still relatively small in Germany, but we see substantial potential for it to develop. Households that are reliant on additional income due to extreme hardship in old age are not the only ones that could benefit from this instrument. Wealthier households could also optimize their retirement and inheritance planning by opting to use reverse mortgages,” Kirschenmann says. To tap this market potential, financial service providers would also need to receive further training and conduct relevant marketing activities.

F. Bartsch, F. Buhlmann, K. Kirschenmann, C. Schmidt: “Is there a need for reverse mortgages in Germany? Empirical evidence and policy implications”

About EconPol Europe

EconPol Europe – the European network for economic and fiscal policy research – is a network of 14 policy-oriented university and non-university research institutes across 12 countries, who contribute scientific expertise to the discussion of the future design of the European Union. The network’s joint interdisciplinary research covers sustainable growth and best practice, reform of EU policies and the EU budget, capital markets and the regulation of the financial sector, and governance and macroeconomic policy in the European Monetary Union.
The network was founded in spring 2017 by the ifo Institute, along with eight renowned European research institutes. A further five associate partners* were added to the network in January 2019.
The foundation of EconPol Europe was made possible by an initiative of the German Federal Ministry of Finance (BMF) to intensify and deepen cross-border research and cooperation in Europe. The ifo Institute was commissioned by the BMF to set up this independent network, providing evidence-based policy advice to inform the economic and fiscal policy debate in Europe.