Reverse mortgages are home-based loans that allow the homeowner access to the equity in their property.
In contrast to a conventional mortgage, they don’t have fixed time horizons, amortization schedules, or regular principal and interest payments. The loan is not due until the borrower vacates the residence, sells the house, or passes away.
But the structure also carries longevity risk, which occurs when it takes longer than anticipated to recoup the loaned money. The borrower’s age has a significant impact on longevity risk, the analysis said.
The recent trend of overheated housing markets, according to Shokhrukh Temurov, vice-president of North American financial institutions at DBRS Morningstar, can also result in a greater share of the risk being borne by lenders as opposed to borrowers.
The reason for this is that younger vintages are more susceptible to a correction, whilst older ones are more secure due to rising property values.
