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Home equity dissavings program for elderly homeowners

University of British Columbia

This thesis addresses the problems of elderly homeowners who wish to remain in their house, but have financial difficulties doing so. Using Census data and data from other Statistics Canada surveys, an examination is made of the financial position of elderly homeowners. It is found that the elderly as a group have low and sometimes inadequate current incomes following retirement. Elderly homeowners are found to have a good overall financial position because their house, usually owned mortgage-free, constitutes a valuable asset. However, this is not a liquid asset. Presently the only way to convert home equity into cash is to sell or rent the house and move out. Yet studies show a strong preference among the elderly for keeping their house as long as they are physically and financially able to do so. Thus a dilemma exists. An examination of current government housing policies relating to the elderly and of existing private financial instruments reveals that little help is available to elderly homeowners facing this dilemma. This thesis investigates alternative "dissavings" plans -financial arrangements which would allow elderly homeowners to consume the equity in their house while continuing to live there. Using up savings in old age is a rational process. When young people build up their home equity they mortgage their future income to acquire the asset, and when elderly people use up their home equity they mortgage their asset to acquire an increased flow of income. The details of three main alternative types of home equity dissavings plans are presented: a split equity housing annuity plan, a nonrepayable loan, and a sales-leaseback agreement. Monetary examples of the financial benefits which these plans could provide for some typical elderly homeowners are worked out. Using the results from two previous surveys of elderly homeowners, a general literature review, discussions with representatives from financial institutions, and reflections by the author, an examination is made of possible difficulties perceived by elderly homeowners, financial institutions and government planners and policy-makers regarding dissavings plans. It is concluded that the objections do not make a home equity dissavings program infeasible. Thus necessary steps for implementing such a program are recommended. It is felt that private financial institutions should be able to offer the program, but that initial government involvement would be essential. It is not recommended that the government actually set up and run the program either initially or on a long-term basis since this would involve duplicating functions which existing private financial institutions are already providing. It is recommended instead that the government should do some of the initial groundwork for the program and after that simply act as a guarantor to private financial institutions. Some aspects of the federal government's recommended role are as follows: It should conduct market research of potential users. It should investigate and effect necessary changes in federal and provincial legislation to remove legal barriers to implementing a dissavings program. It should initiate detailed dialogue with private financial institutions in order to negotiate the terms of government involvement under which financial institutions would be willing to participate in a dissavings program. It should undertake an educational and publicity program presenting the logic of dissaving in old age and helping elderly homeowners to grasp the implications of the proposed plans. On an on-going basis it should supervise and regulate the operation of the dissavings program in order to safeguard the interests of elderly homeowners.

Text

2010-02-21

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http://hdl.handle.net/2429/20694

Planning

University of British Columbia

Graduate