| dc.description.abstract | The Norwegian population is getting older, and future generations are expected to receive less pension than generations before them. However, many seniors have large savings tied up in home equity, which can be released through the reverse mortgage product. The reverse mortgage is a non-recourse loan, guaranteeing borrowers a lifelong residency without having to make interest or instalment payments. Interests are added to the loan balance, exposing lenders to risk of the loan exceeding the value of the mortgaged property. This risk is associated with potential costs for the lenders.
This study aims to analyse the profitability of the reverse mortgage product on the Norwegian market, and how the profitability is influenced by key parameters affecting the lenders’ exposure to risk. An essential part of studying the product’s profitability is to find the costs related to the embedded guarantee. For this purpose, we adopt a modified version of the Black-Scholes model and termination probabilities, using plausible input data for the Norwegian market. By calculating the potential income and costs related to a reverse mortgage loan, we obtain the lenders’ expected day one profit. We perform various sensitivity analyses in order to study the loan’s profitability in different scenarios. Our findings suggest that reverse mortgages are highly profitable, and that younger borrowers are the most profitable customer segment. The results further exhibit that large deviations from the baseline scenario must occur in order for the lenders to experience negative day one profits, which suggests that the lenders could increase the loan amount offered and decrease the current interest rate in order to expand the Norwegian reverse mortgage market. | en_US |
