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A Numerical Analysis to Study Whether the Early Termination of Reverse Mortgages is Rational

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  • Hyung-Suk Choi

    (School of Business, Ewha Womans University, Seodaemun-gu Ewhayeodae-gil 52, Seoul 03760, Korea)

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.

Suggested Citation

  • Hyung-Suk Choi, 2019. "A Numerical Analysis to Study Whether the Early Termination of Reverse Mortgages is Rational," Sustainability, MDPI, vol. 11(23), pages 1-10, December.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:23:p:6820-:d:292861
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    References listed on IDEAS

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    Cited by:

    1. Chunil Kim & Hyobi Choi & Yeol Choi, 2021. "Retirement Age and Housing Consumption: The Case of South Korea," Sustainability, MDPI, vol. 13(3), pages 1-21, January.

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