Meeting the Challenges of Longevity: Lifetime Income from Real Estate

The reverse mortgage, in spite of its low uptake, is a tool of protecting the so-called house rich-cash poor persons. It represents an opportunity especially in social realities with a high aging population, pension systems struggling to guarantee acceptable living standards, sig- nificant proportion of homeowners with insufficient income to meet daily expenses. The paper is interested in this contract by looking at it from the point of view of the provider/lender who commits to a payment to the borrower/pensioner against the amount that will be made when the house is sold, in which the borrower will continue to live for life. Our focus is on quantifying the risks that impact the contract, due to three main sources of uncertainty. The purpose is to provide formulas for quantify- ing each of these risks, which are easy to interpret and apply, and useful for proceeding to profitable risk control strategies.