A feasibility analysis of reverse mortgages in Brazil

Abstract

In this study, we examine the feasibility of reverse mortgages in Brazil from the perspectives of both policyholders and insurers. Reverse mortgage is a financial product where the property's ownership is transferred to an insurance company in exchange for a guaranteed annuity, while the insured retains the right to use such property until their death. Using monthly real state pricing data (2008–2019) provided by FipeZAP, we employ statistical modeling to predict future prices of properties to get the future insurer's expected results, while policyholders' annuity benefits are calculated using actuarial approach. To assess attractiveness, we calculate internal rate of return for different policyholder profiles and conduct profit test for the insurer. Our results indicate that, as an investment strategy, reverse mortgage has little or no attractiveness to the policyholder despite its actuarial fairness. However, it may be a viable option for increasing retirement income in case of a consistent real estate overvaluation. For insurers, the results are unfeasible due to the extended time lag for positive financial results, which only occurs after the policyholder's death. The inclusion of safety loadings can produce more favorable outcomes. Nonetheless, we recommend incorporating reverse mortgages as an elderly policy strategy to reduce reliance on state support during retirement, even if no attractive returns are provided as a financial investment. We also discuss policy implications (e.g., right to the city) to help the elderly stay connected to social support networks and local services.