Key Takeaways
- Reverse mortgage lending is growing in Europe as new lenders enter the market to support increasing borrower demand for the product.
- Historically, insurance companies have been the main originators of reverse mortgages in the U.K., but across Europe some new originators, including banks and non-banks, have entered the market.
- House price appreciation over the last decade has provided significant equity for borrowers to release. However, recent rate rises mean that loan origination remains challenging as the loan balance will equate to the property value sooner.
- Europe has seen limited issuance of reverse mortgage-backed securitizations. Previous transactions have performed well, but counterparty exposure tends to restrict ratings. Portfolio sales are also limited as originators are comfortable with their balance sheet exposure including these loans.
Reverse mortgages are increasingly coming under the spotlight in several European countries. New lenders--including some large banks and insurers--are entering the market seeing it as a diversification opportunity, and retirees have taken a renewed interest since the resolution of the previously mis-sold equity release schemes. With mortality rates increasing across Europe, retirees are requiring more income to sustain their lifestyles, especially in their more active early retirement years, and given added cost of living pressures. As reverse mortgage products become more established in each jurisdiction, origination volumes should continue to increase, but this depends on the regulatory oversight that applies to originators and products as overly prudent regulation may limit growth in some countries.
We expect to see sustained interest in reverse mortgage securitizations as lenders continue to grow their mortgage books and develop their historical performance data. However, issuance mainly depends on originator appetite to securitize the loans off their balance sheet and the mitigation of structural constraints such as counterparty risk.
In this report, we provide insight on reverse mortgage loans and compare some of the main European jurisdictions where demand is rising. We also take a closer look at some of the reverse mortgage securitizations that we rate, as well as the main assumptions and risks we consider in our ratings analysis.
What Is A Reverse Mortgage?
A reverse mortgage or "equity release" is a financial product designed to release equity from a property, using it as a guarantee while still retaining ownership. It is a "reverse" mortgage as the borrower is charged interest on the equity released for an undefined term. Borrowers are usually close to retirement age or retired and use a reverse mortgage to help supplement their income in retirement. In most jurisdictions typically no monthly principal and interest payments apply to a reverse mortgage, contrary to the case with a traditional mortgage (chart 1 outlines the differences between the flow of funds of the two products).
Reverse mortgages are generally available in two types:
- A lump-sum plan; and/or
- A drawdown subject to an upper limit.
Interest accrues on the drawn loan amount, plus any interest already charged. The property sale on the borrower's death or move into long-term care ensures the repayment of the rolled-up interest and original lump sum. Most European lenders offer a no negative equity guarantee (NNEG). Chart 5 outlines an example of where the interest is rolled up on two loans to the crossover point or where the NNEG (if available) would be triggered. The initial loan-to-value (LTV) ratio, interest rate, and house price movements will affect when the crossover point is reached. (See "A Matter Of Life And Death: An Assessment Of The Growth Of Lifetime Mortgages In The U.K," for more detail on the characteristics of a reverse mortgage and a comparison versus a traditional residential mortgage.)
Chart 1
Table 1
| Reverse mortgages characteristics | |
|---|---|
| Structural feature or characteristic | Details |
| Capital | Draw-down options can vary by market. Options include a lump sum, regular payments, or a credit facility. |
| Collateral | The property is the collateral. Lender will seek an updated valuation before the loan is underwritten, determining the equity amount. Amount due increases from drawdown with interest accruing and deferred until the borrower's death or move into long-term care. The lender will then typically offer the heirs the option to repay the loan and keep the property. If they decline, the property is sold, with the proceeds used to repay the loan with any excess returned to the borrower's estate. |
| Credit quality | Recourse varies by jurisdiction but tends to be only to the property. Historical defaults have been rare and are primarily due to fraud. Where default does not occur, some jurisdictions cap the property value as the amount that can be pursued. If the borrower lives longer and remains in the property for a greater time period than expected, neither they nor their heirs will be liable for the amount exceeding the property value (see NNEG below). |
| Interest rate | Mainly fixed in some jurisdictions but variable rates are available. Interest accrues and accumulates throughout the loan's term. |
| Loan term – | No defined period. Triggered by the borrower's death or move to long-term care. |
| No negative equity guarantee (NNEG) | This covers any amount exceeding the cross-over point where the interest accruing exceeds the property's sale proceeds. It ensures that the borrower or heirs are not liable for any excess amounts above the property's value. |
Reverse Mortgage Demand Rises In Europe
Improved regulation has made reverse mortgages more attractive for lenders across Europe. The U.K. is the largest reverse mortgage market with the Equity Release Council confirming a total of over £6 billion of loans originated in 2022 and forecasting growth to reach £12 billion by 2030. The market is small in countries such as Spain, the Netherlands, and Ireland given a more traditional view of limited or no retirement debt and having estate inheritance to pass on to heirs. More broadly, across some European countries, the legal framework for reverse mortgage lending needs further development before the product can be sold (see chart 2).
Chart 2
We have recently seen both new market entrants and existing traditional lenders underwriting reverse mortgage loans. Larger high-street banks are starting to originate loans in some European countries, intensifying competition and giving borrowers more product and price options. Borrowers may gradually start to view the product as a more mainstream form of debt, and their awareness and demand for it is rising as lenders' marketing becomes more prominent. Key factors influencing the rising demand include:
Demand for more retirement funding--and for longer--is rising on the back of longer life expectancy and lower birth rates across Europe (see chart 3). Public pensions are not adequately funding retirees' lifestyles, especially in early retirement where living expenses may be higher. With private pensions often overlooked or funded too late to provide the necessary return, retirees are looking to reverse mortgages as an alternative source of retirement funding. In addition, people approaching retirement can have limited access to loans as their ability to repay reduces significantly or stops altogether. A reverse mortgage can help fund lifestyle adjustments in early retirement, or short-term rising costs where retirees have no access to traditional lending options.
Chart 3
Retirees are not ready to downsize their property or relocate to a new area. Some retirees may have planned to sell their home to fund or partially fund their retirement. Reverse mortgages offer an alternative funding source while being able to stay in their current property.
A reverse mortgage can provide early inheritance or assist with tax planning. With the option to obtain a lump sum upfront, some borrowers may look to provide early inheritance or gifts to heirs. Retirees can also use a reverse mortgage toward future tax planning as they plan their retirement fund.
House prices have increased over the past decade. Rising house prices have made reverse mortgage lending significantly more attractive as more equity is available to borrowers.
Chart 4
Reverse mortgages provide a repayment option for legacy loans originated before the financial crisis in most European countries. Interest-only loans with no principal repayment method or mortgage loans linked to a repayment shortfall can be problematic for vulnerable borrowers with legacy mortgages as the maturity date and retirement are approaching. As mentioned, traditional lending can be difficult to source, however reverse mortgages can provide the funds to repay the outstanding debt.
Comparing Some European Reverse Mortgage Markets
Table 2
| Market comparison | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Country | ||||||||||||
| U.K. | Spain | The Netherlands | Ireland | Sweden | ||||||||
| Typical products | Lifetime mortgage home reversion plan | Lifetime mortgage | Lifetime mortgage | Lifetime mortgage home reversion plan | Lifetime mortgage | |||||||
| Market size | >£1.5 billion | <€0.5 billion | >€0.5 billion <2.0 billion | <€0.5 billion | <€0.5 billion | |||||||
| Main originators | Just, Aviva, Legal & General, Standard Life, Nationwide Building Society, Scottish Widows, Pure Retirement, More2Life | Óptima Mayores, Banco Santander | SocioHypotheek, Florius | Spry Finance, Home Plus | Svensk Hypotekspension, Bluestep Bank | |||||||
| No negative equity guarantee* | Yes | Yes | Yes | Yes | Yes | |||||||
| Rate type(s) | Fixed (or if variable a cap must apply) | Fixed or variable | Mainly fixed | Mainly fixed | Variable | |||||||
| Prepayment option | Yes* | Yes | Yes§ | Yes | Yes | |||||||
| Industry body | The Equity Release Council, European Pensions and Property Asset Release Group (EPPARG) | European Pensions and Property Asset Release Group (EPPARG) | European Pensions and Property Asset Release Group (EPPARG) | European Pensions and Property Asset Release Group (EPPARG) | European Pensions and Property Asset Release Group (EPPARG) | |||||||
| Regulator | Financial Conduct Authority | Banco de España | Dutch Financial Authority (AFM) | Central Bank of Ireland | Finansinspektionen | |||||||
| Main funding sources | Insurance companies† | Banks and insurance companies† | Banks and insurance companies† | Non-bank lenders | Bank | |||||||
| Previous securitizations | Yes | No | No | Yes | Yes | |||||||
| *Legacy loans may not have this feature. §Some products have the flexibility to make monthly interest payments. †Remain on balance sheet. | ||||||||||||
Reverse Mortgage Securitization: A Limited Market
Europe's reverse mortgage securitization market has been limited to date, comprising a small number of transactions in the U.K., Sweden, and Ireland. The main factors inhibiting issuance appear to be transactions' structural limitations (due to excessive counterparty exposure and irregular flow of funds from the assets), the volume of available collateral, and the number of issuers with adequate historical performance data.
Reverse mortgages are heavily regulated primarily due to the product's complexity and historical mis-selling issues. This has limited new competition in the market and potentially curtailed the volume of loan origination needed for regular securitized transactions. One example, as outlined in "House Of Cards: Risks Outweigh Benefits For U.K. Insurers In The Growing Equity Release Mortgage Market," is the higher capital charges on reverse mortgages under Solvency II by the U.K. Prudential Regulatory Authority. Upcoming Solvency II changes are expected to be implemented in 2024.
We currently rate five reverse mortgage securitizations under the Equity Release Funding PLC shelf (No.1, No.2, No. 3, No. 4, and No. 5). Norwich Union is the originator (see "Related Research" for more information on these transactions).
All assets have their unique risks that we assess when rating a transaction. Table 3 lists the main transaction risks that apply to a reverse mortgage securitization.
Table 3
| Main transaction risks | |
|---|---|
| Risk | Details |
| Crossover point (LTV ratio) | Each borrower has an LTV ratio that corresponds to their equity released and the value of their property. As interest is charged periodically, the LTV ratio rises. The crossover point is where the accrued amount exceeds the potential sale proceeds. If the lender has no insurance all interest after the crossover point will not be received (see chart 5). |
| Mortality rate | The longer a borrower lives, the more interest accrues on the balance over time reducing the remaining equity on the property value. |
| House price declines | The house price value is a key variable in the amount of equity that can be released. Assuming a property value decrease early in the transaction's life can lead to the crossover point being reached much earlier than expected. |
| Prepayment assumptions | Borrowers are much less likely to repay their mortgage early compared to a traditional mortgage. Typically, prepayment would occur only if an heir wanted to keep the property or if a lifestyle event occurred that enabled the borrower to repay the loan. |
| Cost of sale and sale period assumptions | These are normally in line with what we observe in each jurisdiction, and we would typically apply stresses in line with our global residential loans criteria. |
| Counterparty risk | Reverse mortgage transactions may be subject to reliance on a particular counterparty due to the transaction structure. Dependency through counterparty exposure and excess liquidity facility accumulation, can be a feature of some of these transactions. We will apply our counterparty criteria when rating a transaction. |
Chart 5
We apply our most recent criteria when rating new transactions. For jurisdictions where we have not rated transactions to date, we would need to develop new methodology and assumptions (in that case, a request for comment would typically precede the publication of new criteria); alternatively, we could develop an ad-hoc approach under our "Principles Of Credit Ratings" (see "Related Criteria").
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Criteria | Structured Finance | RMBS: Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
- Criteria | Structured Finance | RMBS: Criteria for Rating U.K. Reverse Mortgage-Backed Securities, Aug. 8, 2002
Related Research
- House Of Cards: Risks Outweigh Benefits For U.K. Insurers In The Growing Equity Release Mortgage Market, Oct. 17, 2018
- A Matter Of Life And Death: An Assessment Of The Growth Of Lifetime Mortgages In The U.K., June 1, 2018
- Help The Aged: The Changing Landscape For U.K. Borrowers In Retirement Creates Risks And Opportunities For Lenders, June 1, 2018
- Equity Release Funding (No.5) PLC, Nov. 14, 2005
- Equity Release Funding (No.4) PLC, Aug. 24, 2004
- Equity Release Funding (No.3) PLC, Oct. 29, 2003
- Equity Release Funding (No.2) PLC, Oct. 31, 2002
- Equity Release Funding (No.1) PLC, April 4, 2001
This report does not constitute a rating action.
| Primary Credit Analyst: | Stephen Kemmy, Dublin +353 1 568 0604; stephen.kemmy@spglobal.com |
| Secondary Contact: | Alastair Bigley, London + 44 20 7176 3245; Alastair.Bigley@spglobal.com |
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