The Bank of Korea analyzed that activating dwellings mortgages would increase the gross domestic product by an additional 0.7% and reduce the elderly poverty rate by 5 percentage points (p). The bank advised that the fluctuation in housing prices should be reflected in the pension amount or that the inheritance requirements for dwellings should be relaxed to increase the participation rate.
On the afternoon of the 15th, Hwang In-do, head of the Economic Research Institute of the Bank of Korea, presented the BOK issue note 'Expansion of consumption and alleviation of elderly poverty through the activation of dwellings mortgages and private reverse mortgages' at the 'KDI-BOK Joint Symposium' held at the Korea Development Institute (KDI) in Ban-gok-dong, Sejong City.
A dwellings mortgage is a financial product that allows an elderly person to provide their owned dwellings as collateral and receive a lifelong pension while continuing to reside in the dwellings. To join the dwellings mortgage program, at least one spouse must be over 55 years old, and the publicly announced value of the dwellings owned by the couple must be 1.2 billion won or less.
According to the research team, as of October last year, the participation rate of dwellings mortgages was only 1.89% of the households that met the enrollment requirements, but the potential demand was considerable. A survey of 3,820 homeowners aged 55 to 79 nationwide revealed that 35.3% expressed an intention to enroll in the current dwellings mortgage program in the future.
If product design is improved or additional information about the product is provided, the intention to enroll increased to an average of 41.4%. Specifically, measures such as reflecting the fluctuation in housing prices in the pension amount (39.2%), restructuring to facilitate inheritance (41.9%), and providing information that an increase in house prices after enrollment is not a loss (43.1%) significantly raised the intention to enroll.
The research team projected that activating dwellings mortgages would positively impact our economy in both growth and distribution. Using a macroeconomic model for analysis, the optimistic scenario showed that if all households with an intention to enroll joined the dwellings mortgage program, the real GDP of our country would increase by 0.5% to 0.7%, and the elderly poverty rate would decrease by 3 to 5 percentage points (p).
In contrast, in a pessimistic scenario assuming that the low participation rate seen thus far continues despite the high intention to enroll, the economic effect fell to less than one-twentieth of the previously presented figures. An intermediate scenario showed that if the number of participants increased to the level of major countries like the United Kingdom, which introduced dwellings mortgages earlier (new participants 370,000), the GDP scale would increase by 0.1% and the elderly poverty rate would decline by about 0.5% to 0.7%p.
The research team argued that to translate the high potential demand for dwellings mortgages into actual enrollments, institutional improvements are necessary. Specifically, they emphasized the need to reflect fluctuations in housing prices in the pension amount, relax inheritance conditions for utilized dwellings, and strengthen enrollment incentives such as tax benefits.
The research team also suggested that the activation of private financial institutions' reverse mortgages should proceed in parallel. A reverse mortgage is a loan product similar to a dwellings mortgage, where homeowners receive a fixed amount monthly from financial institutions, using their dwellings as collateral.
The research team stated that, similar to the current dwellings mortgage program, private reverse mortgage products should be excluded from regulations such as loan-to-value ratios (LTV), debt service ratios (DSR), and total debt-to-income ratios (DTI) to ensure that products offering lifetime payments and non-recourse terms are launched. They also noted that market entry should be encouraged for life insurance companies with rich experience in managing lifetime financial products.