A numerical analysis to study whether the early termination of reverse mortgages is rational

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Abstract

A reverse mortgage supports the aging society more sustainably by providing stable cash flows to elderly retirees. Although the reverse mortgage market has successfully grown in many developed countries, we have observed significantly increased early terminations due to the recent housing market boom in Korea. In this study, we provide the numerical solutions for the monthly payment from the actuarial pricing model of the reverse mortgage, reflecting the house price growth and mortality improvement to examine whether the early-termination-and-repurchase strategy is profitable. Findings suggest that in order for the strategy to be profitable, the realized growth rate of the house price should be significantly greater than the expected growth rate in the actuarial pricing model. Furthermore, for the older borrower, the greater growth rate of the house price is required for the strategy to be profitable.

Original languageEnglish
Article number6820
JournalSustainability (Switzerland)
Volume11
Issue number23
DOIs
StatePublished - 1 Dec 2019

Bibliographical note

Funding Information:
Funding: This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2015S1A5A2A03048222).

Publisher Copyright:
© 2019 by the author.

Keywords

  • Aging society
  • Longevity
  • Real estate market
  • Reverse mortgage
  • Termination cost

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