VALUATION OF REVERSE MORTGAGES IN THE SPANISH MARKET FOR FOREIGN RESIDENTS

Abstract

The continuous growth in life expectancy, besides to the difficult economic and financial situation of the public pension system in Spain, makes reverse mortgages an attractive solution for providing additional income to retirees. However, despite being almost 20 years old, the Spanish market remains immature. Consequently, providers face significant risks, due to factors such as interest rates, housing prices, and longevity. Numerous tourists visit Spain, and many retire there, obtaining legal residence. Therefore, lenders could be interested in marketing reverse mortgages to foreign residents. Nevertheless, the longevity risk faced by these lenders may differ depending on the nationality of the borrower, and profits and losses could vary. Consequently, we propose a methodology for comparing the pricing of reverse mortgages in Spain by considering differences in longevity risk. Specifically, we calculate the amount offered by three types of reverse mortgages to customers of different nationalities, genders, and ages with contracts made in Spain. Our conclusions are pertinent to Spanish lenders since the results indicate that, in general, a Spanish lender would assume a slightly larger risk when lending reverse mortgages to borrowers of the selected nationalities, regardless of other considerations, such as legal issues, which are not addressed in this article.