Housing equity withdrawal for development of assisted-living facilities

What is it about?

How to provide adequate services and housing for an increasing number of people that are dependent on the help of others is a crucial question in the EU. The housing stock in Europe is not fit to support a shift from institutional care to the home-based independent living. Some 90% of houses in the UK and 70-80% in Germany are not adequately built, as they contain accessibility barriers for people with emerging functional impairments. The available reverse mortgage contracts do not allow for relocation to their own adapted facilities. How to finance the adaptation from housing equity is discussed. We have extended the existing loan reverse mortgage model. Actuarial methods are used to evaluate premiums for flexible longevity and lifetime long-term care insurance for financing adequate facilities. The adequate, age-friendly housing provision that is appropriate to support the independence and autonomy of seniors with declining functional capacities can lower the cost of health care and improve the well-being of older adults. For financing the development of this kind of facilities for seniors, we developed the reverse mortgage scheme with embedded longevity and long-term care insurance as a possible financial instrument for better long-term care services and housing with care in assisted-living facilities. This kind of facilities should be available for the rapid growth of old cohorts. . While current reverse mortgage contracts lapse when the homeowner moves to assisted-living facilities, in our paper a new method is developed where multiple adjustments of housing to the functional capacities with relocation is possible, under the same insurance and reverse mortgage contract. These insurance products are portable, so the homeowner can move in own specialized housing unit in assisted-living facilities and keep the existing reverse mortgage contract with no additional costs, which is not possible in the current insurance products. The housing stock in Europe is not fit to support a shift from institutional care to the home-based independent living. According to the report of European Innovation Partnership on Active and Healthy Ageing, some 90% of houses in the UK and 70-80% in Germany are not adequately built for the older adults with declining functional capacities. Our recent results in Slovenia show that only 40% of the older adults think that their family home is suitable enough for ageing in place, while the other 60% is expecting that they will need to move to the assisted living facilities or nursing homes after substantial decline of their functional capacities (Bogataj et al., 2019). The studies of Wood (2017) and current evidence of Housing LIN listed at https://www.housinglin.org.uk/Topics/type/ has shown that the vast majority of residents in sheltered housing “feel more sociable, more autonomous, safer, healthier and overall happier” in comparison with other options. Therefore, the technical properties of housing units should be adopted to the abilities of older adults. To move in such adapted homes, the residents can lease or own the property. Sheltered housing is developed in English speaking world, but in Eastern and Southern Europe are underdeveloped. In terms of financial capabilities, renting is easier for western Europeans, while eastern Europeans have low monthly earnings, but are asset rich by owning real estate in which they reside. Table 2 shows that the inhabitants of most Eastern European and Southern European countries own a large proportion of the houses and apartments in which they live. These are often too big for the single-family households of the old adults and are not adequately built for the person with declined functional capacities. The option of these cohorts would be to choose an ERS product. Current reverse mortgage products like HECM in the US and the reverse mortgage schemes offered by financial institutions in UK stipulate that the contract ends after the homeowner moves out of the property when the financial institutions get the right to sell the property under the reverse mortgage and repay the loan. Such products make it difficult to purchase a well-adapted home in assisted living facilities, extra care housing, housing with care, or an assisted living facility in a retirement community. The only option for an older adult is to move directly to a nursing home, resulting in high public and/or private expenditures. We have shown that by using actuarial mathematics, the current reverse mortgage contracts can be improved so that the equity in the property can be preserved even when the family home is sold, and a unit in the assisted living facility is purchased under the parameters determined in advance. The product remains risky for contractors due to the volatile real estate market and unknown longevity of homeowners. According to the Case-Shiller index in the last 130 years in 6% of cases, this index was below 100 after 16 years (Bogataj, 2013). These risks are insurable. Product is also exposed to the interest rate risk, which can be mitigated with standardized and tailored financial derivatives. Therefore, the scheme has been adjusted so that also enables multiple movings from a single-family house to owner-occupied flats in the assistant living facilities adapted to the functional capacities of the residents. All these changes of housing property are possible under a single contract scheme and could also finance the nursing home when needed with the lifetime annuity from built up the insurance reserves. According to EUROBAROMETER 283, 25% of older adults consider using housing equity as an acceptable option. However, in most Eastern European countries there is no specific legislation to regulate a reverse mortgage so that the user’s property rights would be protected. In the US, Loan-to-Value is between 50% and 65% from where the interest is covered from the lifetime annuities since MLA includes the capitalised interest rate. In our model, the expenditures and charges are very transparently presented and not just hidden in a Loan-to-Value Ratio, and the payment of interest is insured for the lifetime of the borrower. The MLA to VRE is not the same as the Loan-to-Value. Therefore, our product is less exposed to risk for financial institutions. The expenditures C1 in our model associated with reverse mortgages and fees can include advisor/broker fees, legal expenses, property valuation, arrangement fees and completion fees. Expenditures related to the sale of the property C2 include preparation of a property for sale, legal fees, closing of the contract, real estate broker commission, and other expenses related to the sale of the property. In our model, MLA incorporates capitalised interest and not only the cash flow disbursed to the property owner. Our model consists of all transaction costs connected with the property, except (a) the interest rate, (b) the longevity premium and (c) the LTC insurance premiums in C, which are embedded in the actuarial calculations. Therefore, the parameters in the model are more transparent than in the current reverse mortgage products for a user. C depends on the system of real estate management and the sales process established. From our research in Slovenia, reverse mortgage products are acceptable for homeowners only if the interest rate is low enough. Transparent presentation of expenditures and charges are essential for the clients. The efficient and affordable risk- management mechanism is needed as suggested in the scheme. For the government it is much cheaper to subsidize the interest rate and to take the real estate value risk than to finance 100% of LTC from the budget.

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