Shared-risk reverse mortgage

In order to overcome these four constraints, a “shared-risk reverse mortgage” deserves consideration.  

1.      This report examines how to implement the Korea customized shared-risk reverse mortgage scheme that allows both government (public guarantee institution) and borrowers’ children to share the loss and benefits arising from the four constraints. The scheme, therefore, increases effectiveness of the monthly payout.

 

a)      If the government alone takes responsibility for securing the monthly payout, the scheme will not be sustained because of the loss of the public guarantee institution like a snowball. If the government scales down the monthly payout, people will be reluctant to take out a reverse mortgage because it won’t adequately support their retirement.  

b)      Although the Confucian concept of filial piety is disappearing in society, it is still a deeply rooted value. This reverse mortgage is a new type of scheme, still reflecting the Korean traditional culture in which "children look after their parents". This Korea customized reverse mortgage enables the children to make a certain contribution to the stability of their parents’ retirement by using parents’ property.

c)      Main borrowers of the shared reverse mortgage will be retirees but the parties of the contract under the scheme are not limited to retiree and public guarantee institution. However, once qualified as clients, the children are also included to share the four risks.

 

2.      In practical terms, the shared reverse mortgage is a scheme where, in order to keep the monthly payout to a certain level, the burden of these three risks is shared by government (public guarantee institution) and children, ultimately leading to avoiding insolvency and to keeping on promoting the reverse mortgage.

 

a)      Longevity risk: when a retiree passes away earlier than expected, remaining equity in property will go to his or her children, but if the contrary occurs, the burden will be split between the government and the children.  

b)      Interest rate and house value risk: after a pensioner passes away, if the house value is higher than when the reverse mortgage was signed due to a fall in interest rate or a rise in house price, the remainder goes to his or her children. If the contrary occurs (a fall in housing price), the payment of the difference is shared by both the government and the children.    

 

3.      Besides, the reverse mortgage scheme alone will not solve the problems that society is facing, including aging population and retirement income shortage. It is, therefore, also important to lessen the burdens of the elderly, for instance, by combining the reverse mortgage with other social security solutions so that the reverse mortgage can be rolled out smoothly.

a)      The reverse mortgage scheme is judged very difficult to be used as a measure for income security for the elderly who live in regions other than Seoul, metropolitan areas and big cities.   

b)      It is also urgent to create a reverse mortgage scheme that combines appropriately with an array of social security solutions, in addition to pay attention on the retirement of the underprivileged who cannot afford the reverse mortgage scheme. 20151109

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