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

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.