A Numerical Analysis to Study Whether the Early Termination of Reverse Mortgages is Rational
School of Business, Ewha Womans University, Seodaemun-gu Ewhayeodae-gil 52, Seoul 03760, Korea
Sustainability 2019, 11(23), 6820; https://doi.org/10.3390/su11236820
Received: 9 September 2019 / Revised: 25 November 2019 / Accepted: 26 November 2019 / Published: 1 December 2019
(This article belongs to the Section Economic, Business and Management Aspects of Sustainability)
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.
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Keywords:
aging society; longevity; real estate market; reverse mortgage; termination cost
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MDPI and ACS Style
Choi, H.-S. A Numerical Analysis to Study Whether the Early Termination of Reverse Mortgages is Rational. Sustainability 2019, 11, 6820.
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