Abstract
This study explored the option value embedded in a reverse mortgage in Korea through an empirical analysis, using the Black–Scholes option-pricing model. The value of a reverse mortgage is affected by the variation in house prices. However, older homeowners using reverse mortgages are able to choose this option due to the unique characteristics of reverse mortgages, such as non-recourse clauses or being able to redeem the loan. This paper found the following results. First, the call option value is 5.8% of the house price at the age of 60, under the assumption of a KRW three hundred million house value, while the put option value is only 2.0%. Contrary to what it is at sixty years of age, only the call option value will remain when the homeowner reaches the age of 80. Second, this article analyzed the sensitivity of the key variables of real-option analytical models, such as the change of the exercise price, the change of the risk-free rate, volatility, and maturity, on the option value of a reverse mortgage. The sensitivity results of the key variables supported economic rationales for the option pricing model.
Highlights
A reverse mortgage is a scheme wherein senior citizens who are owner-occupiers of houses can receive fixed monthly instalments in the form of pensions (Han et al 2017)
A rapid increase in this market started in 2014, when Korean house owners became more interested in this product due to reverse mortgages being highlighted on local news media, and lower market interest rates1
This study found that when the applicant age is lower, the the benefit of a reverse mortgage is greater
Summary
A reverse mortgage is a scheme wherein senior citizens who are owner-occupiers of houses can receive fixed monthly instalments in the form of pensions (Han et al 2017). The phenomenon of aging societies in developed countries and low-interest rate environments are contributing to serious problems with pension systems. Due to these issues, the importance of reverse mortgage products is increasing, as they can guarantee the income of the elderly (Knaack et al 2017). The ratio of Korean citizens who are older than 65 the total Korean population has been rising rapidly, from 7.2% in 2000 to 14.9% in 2019 This ratio is expected to increase even further to 46.5% by 2067, according to Statistics Korea. The global ratio of over 65s was 9.1% in 2019, and is expected to increase to 18.6% by 2067, according to the UN This is one of key factors promoting reverse mortgages in Korea
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
