Abstract

This study aimed to initiate a farmland reverse mortgage (FRM) for the welfare of the elderly in rural areas by liquidating the farmland which produces little product or is left uncultivated due to the labor shortage even though the farmland value is relatively high. We built the actuarial model based on housing equity conversion mortgage (HECM) model suggested by Rodda et al. (2000, 2003). Basic factors such as interest rates, farmland value rising rates, loan survival probability and loan termination probability were elaborated on, with historical data, and applied to the actuarial model for estimating a constant monthly payment (pmt) that the borrowers can receive under the condition that present value of estimated loss (PVEL) is equal to present value of mortgage insurance premium (PVMIP). Based on the established model, monthly payment was calculated according to the borrower’s age and his or her farmland value using trial and error method. Then, the risk that the lender bears in depending on the fluctuation of interest rates was predicted. We can provide one more policy option for the elderly in rural areas that covers the deficiency which is not fulfilled by existing national pension services, basic old age pension and other government welfare policies by suggesting the initiation of FRM.

Key words: Farmland reverse mortgage, present value of estimated loss (PVEL), present value of mortgage insurance premium (PVMIP), constant monthly payment (pmt), value at risk.