10 myths and truths about the Housing Pension

-  Know the facts related to your Housing Pension prior to subscribing  -

People often have inaccurate knowledge of the Housing Pension and end up failing to subscribe even though they wish to. A 78-year-old man named Sim, who lives in Sadang-dong, Seoul, had thought that one could not subscribe to the Housing Pension if he or she has outstanding mortgage loans. He, however, joined the Housing Pension last October after learning from press reports that such subscription is in fact allowed. To prevent people like Sim from being misled by faulty information related to the Housing Pension, we share with you 10 myths and truths about the Housing Pension.

1. The initial costs of subscription are high and the costs are non-refundable.

Myth: Costs incurred at the time of subscribing to the Housing Pension include initial guarantee fees, expenses to establish the right to collateral security, and the stamp tax. The initial guarantee fees, a sort of insurance premium to compensate for potential future losses, need not be paid in cash. The entire amount of initial guarantee fees is refunded if one withdraws his/her subscription to the Housing Pension after receiving benefits just once after subscription. The fees are partially refunded even when a pensioner’s house is destroyed by fire or other natural disaster. The registration tax and other expenses among those for establishing the right to collateral security are exempted; all one needs to pay is the commission for the judicial scrivener.

2. To subscribe to the Housing Pension, you must undergo valuation on your house and pay the valuation fees.

Myth: When subscribing to the Housing Pension, your house does not need to undergo valuation if the price information is available at the Korea Appraisal Board or on the online database of Kookmin Bank. Valuation needs to be performed only when no price information is available.

3. The Housing Pension fails to cope with ever-rising interest rates.

Myth: You may choose the “fixed-rate increase” type for your monthly Housing Pension benefits, and the monthly benefits will increase 3% each year to compensate for inflation.

4. Amount of monthly benefits determined upon subscription remains the same even if housing prices go up.

Truth: Monthly benefits determined at the time of subscription remain unchanged even if housing prices increase. These monthly benefits, however, are calculated under the built-in assumption that housing prices will rise 3.3% annually in the long run. Monthly benefits being affected by fluctuating housing prices after subscription to the Housing Pension would not be a desirable situation as it may undermine the very stability of your retired life.

5. The ceiling for the Housing Pension is fixed at 0.3 billion Korean won, putting owners of high-priced housings (0.5-0.6 billion Korean won) at a disadvantage.

Myth: The ceiling for the Housing Pension* was raised from the initial 0.3 billion Korean won to 0.5 billion Korean won in March 2009. Even if pension benefits are smaller than what pensioners can get by selling their houses, this does not put them at a disadvantage as the differences are handed over to their bereaved families upon their death. (Meanwhile, bereaved families are not asked to provide the excess if pension benefits paid until the death of pensioners exceed the value of their houses upon disposal.)

  (* The ceiling for the Housing Pension converts pension benefits to be received until the age of 100 into present value.)

6. You cannot freely spend the Housing Pension that you receive out of your own home. You may spend up to 15% of your ceiling for very limited uses such as medical treatment and child’s wedding.

Myth: From your monthly Housing Pension benefits, you may use up to 50% of your ceiling for the Housing Pension freely for any purposes – except for gambling, housing purchase and other disallowed uses.

7. Once you subscribe to the Housing Pension, you cannot move out.

Myth: You are free to move into a new place. You may change your collateral from the existing house to the new one and keep receiving your Housing Pension. In such case, you may potentially be required to repay your Housing Pension loans, see your monthly benefits change and asked to provide additional initial guarantee fees depending on the collateral value of the new house. If you rent your existing house and move into a new place, however, this constitutes a suspension event as you will have violated the residence requirement.

8. You need to fully repay your mortgage loans before subscribing to the Housing Pension.

Myth: You may subscribe to the Housing Pension by repaying your existing mortgage loans with the lump sum withdrawal, which allows you to withdraw in a lump sum at once.

9. Your contract will be terminated if your house is redeveloped or reconstructed.

Not always: Your house being redeveloped or reconstructed constitutes a suspension as your ownership of the house is lost. However, you can continue to receive the pension benefits by selling the to-be-redeveloped/reconstructed house and changing your collateral to the house that you newly purchase.

10. Homeowners are required to pay a wide array of taxes even after subscription to the Housing Pension, and their contracts are cancelled if they fail to pay their taxes.

Partially true: Every homeowner must pay housing-related taxes. Housing Pension pensioners, however, enjoy tax benefits such as a 25% cut in property tax (applicable only when the official housing price meets the 0.5 billion Korean won mark) and pension income deductions on loan interests paid.