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Senior citizens consult with officials of the Korea Housing Finance Corp. about reverse mortgages in this file photo. Reverse mortgages are gaining popularity among senior citizens but as life expectancy is rising and the house market continues to be in the doldrums, they may face disadvantages. / Korea Times file photo |
By Chung Ah-young
Korean senior citizens are using their properties, mostly apartments, as collateral.
Reverse mortgages are a financial tool for homeowners aged 60 and older to get money against the value of their homes.
To older workers who fail to have an adequate pension for retirement and are still struggling to repay loans on houses, the allure of reverse mortgages is obvious.
However, as the life expectancy has been rising and the house market continues to be in doldrums, reverse mortgages might face pitfalls.
Park Deok-bae, a researcher of the Hyundai Research Institute, said in his report that the Korea Housing Finance Corp. (HF), which provides the reverse annuity mortgages, will run out of money if the aging population continues to grow, the interest rate rises and house prices keep falling.
To solve the potential problems of reverse mortgages, he said that the government and children of the borrowers should share the risks that such economic factors can bring in the future.
The report said that if interest rates move upward, if borrowers live longer and if house prices continue to decline, the monthly annuity will be a growing burden for the loan provider.
Also, more and more baby boomers are expected to use reverse mortgages as they resort to their real estate assets rather than financial assets for their retirement.
Since the first introduction of the program in 2007, reverse mortgages have been gaining popularity in Seoul and Gyeonggi Province due to the higher monthly annuity compared to other pensions.
As of the late last year, some 22 trillion won has been extended.
The researcher said that reverse mortgages are favorably designed for the borrowers, given the changeable economic factors.
If the HF continues to pay the annuity despite such changes, its losses will snowball and as a result, taxpayers' money will be used to make up for this, Park said.
"In the longer term, it will make the reverse mortgage market decline," he said.
To prevent this, Park suggested that the HF and children of the annuity recipients share the burden in accordance with changes in conditions.
Under the system, if the beneficiaries pass away earlier, the rest of the house value should be handed down to their children. But if they live longer than expected or the house price is reduced and the interest rate rises, the heirs and the government alike should share the excessive amount.
"More and more senior citizens are expected to use reverse mortgages but under the current system, the government will hardly pay the annuity for the recipients or reduce the monthly annuity. To maintain a regular monthly annuity, the government and children should share the risk," he said.