by Noriyuki Morimoto
In a super-aging society, we can no longer afford to take a consumer-centric approach in housing, allowing homes to be discarded after single use as durable consumer goods. We must take a housing-centric approach to supply homes with asset value that can be used semi-permanently according to demographic trends. Looking at this shift from a financial perspective, it means that mortgage loans will change their status from de facto consumer loans to loans backed by the asset value of the homes.
A reverse mortgage is a type of loan that is based on the asset value of the home. In a reverse mortgage, the total principal and interests are repaid in a lump sum with the proceeds from the sale of the home. This means that an elderly person does not have to repay the reverse mortgage during their lifetime, but can use their money for consumption to live a prosperous retirement life, and after their death, the value of the house supports the lump-sum repayment of the principal and interest.
A home equity loan is another option. In a conventional mortgage loan, the principal is repaid in equal installments, so if the asset value of the home is maintained, there will be a margin of safety in the collateral as the loan balance decreases over time. Home equity refers to that margin, and in a home equity loan, the margin is pledged as new collateral for financing.
In Japan, home equity loans are not widely used because the asset value of a house is not evaluated, and there is no room to appraise the increase in the overall asset value of the house as a result of extensions or renovations, so the concept of the home equity loan has not been applied to extension/renovation loans either.
However, with the further aging of the population, financial institutions will increasingly need to drive drastic changes in the structure of the housing market, so that reverse mortgages, home equity loans, and extension/renovation loans that focus on the asset value of housing will become more prevalent. We must create a virtuous cycle in which the value of housing is increased, financial methods are diversified, and the structure of home financing further increases the value of housing.
[Category /Deconstruction of Finance]
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.