a complete guide to home equity lines of credit, from terms to payouts to termination. unlock the money locked up in your home and set yourself up for a comfortable retirement. How to Use a Reverse Mortgage in a Nutshell
table of contents
- the reality of retirement: home annuities are the answer
- what is a home annuity?
- how does a home equity annuity work?
- trust vs. mortgage
- what to Do If You Cancel Your Housing Annuity
- why housing annuities can solve poverty in retirement
- how it works with home downsizing
- frequently Asked Questions
the reality of retirement: housing annuities are the answer
retirement is in full swing for the first wave of baby boomers, followed by the second wave of baby boomers. the financial impact is greater than you might think, as the paychecks that came in automatically every month while you were working stop coming in at the same time as you retire. the age of receiving the national pension has been delayed by one year, so those born in 1969 must wait until age 65 to receive it, and even then, the amount is not enough.
let's take the case of Mr. A, who has a 62-square-meter apartment in a medium-sized city in the metropolitan area as collateral for his housing pension. He has been receiving 1.03 million won per month since joining the pension three years ago. this is more than twice the amount of 470,000 won he received from the national pension and basic pension combined. before joining, he had to rely on his children for living expenses, but now he can afford to give pocket money to his grandchildren who are in need.
your home is the largest part of your retirement assets. keeping the money locked up in your home flowing can make your retirement more comfortable.
what is a home equity annuity?
a home annuity is a reverse mortgage loan that puts your home in your name as collateral and pays you a monthly annuity. In other words, it's a loan secured by your home, but unlike a regular loan, it's a lifetime annuity.
not only apartments, but also houses and residential offices under the Housing Act are eligible. the Korea Housing Finance Corporation issues a guarantee to the bank, and the bank pays a monthly housing pension based on this guarantee.
an important feature is that it is non-consumptive. if the amount received exceeds the disposal price of the house, the heirs are not charged extra. Conversely, if the amount received is less than the disposal price, the difference is returned to the heirs.
there are two main types of payout plans: fixed term and life. life annuities are also available in a variety of options, including flat rate, initial increase, and periodic increase, to suit your personal situation.
how to enroll in a housing pension
since its launch in 2007, the housing pension has steadily relaxed the requirements for enrollment. Initially, both members of a couple had to be 65 years old or older, but now the elder member of the couple can enroll as long as they are 55 years old or older. the home price requirement has also been expanded from 600 million won or less to 1.2 billion won or less.
multihousers can also join as long as the combined market value of their homes is KRW 1.2 billion or less. the listed price of 1.2 billion won is equivalent to about 1.7 billion won at market prices. even if you have a mortgage, you can receive a portion of the pension to pay off the loan and receive the pension as the balance.
the higher the value of your home and the older you are at the time of enrollment, the larger your monthly payment will be, so it's important to strategize when to enroll based on your situation.
trust vs. mortgage
there are two types of home annuities. before June 2021, only the mortgage option was available, where you put a first mortgage on your home as security. In this case, your spouse would need your consent to continue receiving your state pension after your death.
after the child pays back the amount of housing benefit received so far, plus any additional costs, the ownership of the house is inherited. However, due to the number of legal disputes between spouses and children after the death of the member, the trust method was introduced.
the trust method changes the registered owner to the Housing Finance Corporation. the advantage is that the housing pension benefits are automatically transferred to the spouse without the child's consent. Also, unlike the mortgage method, the trust method can be rented out. however, the deposit is managed by the corporation, and the structure provides investment returns at the level of time deposits.
hana Financial Group's My Home Annuity, which it launched in May last year, is also a trust method. it was designated as an innovative financial service by the Financial Services Authority and is characterized by the fact that it can be subscribed to even houses worth more than 1.2 billion won. hana Life Insurance acts as the housing finance corporation, and it is available only at Hana Bank.
what to do when canceling your housing pension
when house prices increase rapidly, the number of housing pension enrollments increases, but so does the number of terminations. in 2021, when house prices increased significantly, there were 4118 mid-term terminations, more than twice as many as terminations due to death in the last decade.
if you cancel early, you'll have to pay back the annuity you received plus interest, a 1.5 percent initial guarantee fee, and a 0.75 percent annual guarantee fee that accrues each year. since you received the annuity monthly, the interest is compounded monthly.
for example, if you mortgage a 500 million won house and receive 1.5 million won per month, and you terminate it after five years, you will have to pay back about 110 million won. The actual annuity you receive is 90 million won, but it's the sum of the guarantee fee and loan interest, so you need to carefully calculate whether the increase in the price of the house will make up for these additional costs.
the Housing Finance Corporation's housing annuity cannot be rejoined within three years of termination. if you cancel during a period of rising prices, you may not be able to sell your home and lose money when prices drop again. hana Financial's home annuity can be re-subscribed immediately after termination, but only up to three times.
why housing annuities solve poverty in old age
the reason why many research organizations are focusing on housing annuities is due to Korea's demographic and asset structure. 20.3 percent of the total population is aged 65 or older, and it is expected to be around 30 percent in 10 years.
worse still is the poverty rate among the elderly. at 38.2 percent in 2023, it tops the list among the 38 member countries of the Organization for Economic Cooperation and Development. this means that four out of 10 seniors live on less than half the median income.
the poverty rate is measured by a cash flow called disposable income. it does not take into account real estate holdings, such as houses or land. While the self-ownership rate among the elderly in South Korea is higher than other age groups at 78.2 percent and the self-occupancy rate at 75.7 percent, real assets account for a disproportionately high share of total assets.
last year, the Bank of Korea surveyed 3,820 homeowners aged 55 to 79 nationwide and found that most were aware of the housing pension, but were reluctant to sign up for it, citing concerns about losses, hopes of inheritance, and the fact that house price appreciation is not reflected in the amount they receive.
the Bank of Korea predicted that a more active housing pension would alleviate elderly poverty and have a positive impact on the economy by stimulating consumption. In fact, a 2015 study by the Korea Institute for Health and Social Research found that housing pensions improved elderly poverty.
tie in with home downsizing
before you sign up for a housing pension, it's worth rethinking the size of your home. after your children grow up, you are more likely to be a couple or single household. A home that is too large for the number of people living in it can be a source of emotional loneliness as well as maintenance costs.
in 2023, a system was introduced to help older people downsize their homes. couples with one member aged 60 or older and one home are eligible. if they move from a house worth 1.2 billion won or less to a cheaper house, they can put up to 100 million won in the difference into their individual retirement pension.
starting this year, basic pensioners will be able to put the profit from the sale of real estate held for more than 10 years into their pension accounts, with a 10 percent capital gains tax credit up to a limit of 100 million won.
however, for seniors, moving to an unfamiliar neighborhood can lead to social isolation and poor health. customized housing listings, financial products linked to move-in and move-out, and housing pensions are needed. while high net worth individuals can consult with financial companies, the middle class and below cannot, so local senior welfare centers should take an active role.
among President Lee Jae-myung's pledges, there is a push to expand the 6080 customized housing pension, including relaxing the house price requirement. currently, some banks have reverse mortgage products, but they are not of interest because they are not for life but for a small amount of time. houses eligible for the Housing Finance Corporation's housing pension will have their property taxes reduced by 25 percent until the end of 2027 under the tax law.
frequently asked questions
Q1. What are the conditions for joining the housing pension?
couples can join if the elder of the couple is 55 years old or older and owns a home with a market value of KRW 1.2 billion or less. multihousers are also eligible if the total value of their homes is 1.2 billion won or less. even if you have a mortgage, you can take out a portion of it and receive the pension from the remaining amount after repayment.
Q2. What happens to my inheritance if I receive a housing pension?
if the amount you receive exceeds the sale price of your home, your heirs will not be charged. If the amount you receive is less than the sale price, the difference will be returned to your heirs. if you choose a trust, the benefit automatically passes to your spouse without your consent.
Q3. Will I lose money if I cancel my home annuity early?
if you cancel early, you will have to pay back the annuity, interest, 1.5 percent initial guarantee fee, and 0.75 percent annual guarantee fee. For example, if you received 1.5 million won per month for five years for a house worth 500 million won, you will have to pay back about 110 million won. You should carefully calculate whether the increase in the price of the house will make up for it.
Q4. What is the advantage of a trust or a mortgage?
the trust method automatically transfers the benefit to your spouse without your consent and allows you to rent it out. a mortgage requires child consent for your spouse to continue receiving benefits. if you're concerned about inheritance disputes, a trust is a safer option.
Q5. How many people are enrolled in a housing pension?
there are currently 140,000 people with a housing pension, which is only 2% of eligible households. most people are aware of housing pensions but are hesitant to enroll due to concerns about losses and hopes for inheritance.
a comfortable retirement starts with a home pension
a home pension is an effective way to turn the equity locked up in your home into cash flow and create a comfortable retirement. the requirements are becoming increasingly relaxed, and the introduction of trusts has reduced the risk of inheritance disputes. if you're concerned about your retirement, a home annuity is definitely worth considering.
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