Common questions on reverse mortgages

Common questions on reverse mortgages

By GREGORY CHAN

What is a reverse mortgage?

A reverse mortgage is a financial scheme that allows customers to borrow against the value of their property and receive a cash advance from the lender, either in a lump sum or a series of regular payouts.

The loan is repayable when the property is sold, usually upon the death of the borrower or expiry of the mortgage tenure. Reverse mortgages help homeowners who are asset-rich but cash-poor to stay in their homes and still meet their financial obligations.

In Singapore, reverse mortgages are primarily targeted at senior citizens, providing them with an option to unlock the inherent value of their property through monetary payouts and enhance their retirement needs.

How is a reverse mortgage different from a traditional home loan?

In a traditional home loan, customers make monthly repayments to the lender. But in a reverse mortgage, customers receive monthly payouts from the lender. The loan is repayable when the property is sold, usually upon the death of the borrower or expiry of the mortgage tenure.

Why was the concept of reverse mortgages introduced in Singapore?

The reverse mortgage scheme was one of the options mooted by the government to provide another option for the growing number of senior citizens in Singapore to derive some income from their homes to meet expenditure in old age, without having to move out of their homes.

According to a report prepared by the Committee on Ageing Issues, we will witness an unprecedented age shift between now and 2030. Singapore's population is still relatively young today but this will change significantly over the next six to 24 years. The number of residents aged 65 years or older will increase from 8.4 per cent in 2005 to 18.7 per cent in 2030. In absolute terms, seniors will multiply threefold from the current 300,000 to 900,000 in 2030. By then, one out of every five residents will be a senior. A large proportion of these seniors is expected to be asset-rich but cash-poor.

One of the biggest worries in their retirement years will be financial security. Hence the government has since suggested that reverse mortgage is an additional option to help the elderly monetise, or unlock the value in their property, for a comfortable retirement in addition to various other solutions such as support from their children, downgrading their properties and even continuing with some form of employment.

When were reverse mortgages first made available in Singapore?

Reverse mortgages have been available in Singapore since 1994 when NTUC Income first introduced the scheme for private property owners. Beside NTUC Income, OCBC Bank is currently the only other financial institution to offer reverse mortgages for homeowners of private properties.

Shortly after HDB relaxed its regulations in March 2006 to allow elderly HDB home owners to take up reverse mortgages on commercial terms offered by banks and financial institutions in Singapore, NTUC Income launched reverse mortgages on HDB flats.

Is reverse mortgage a popular financing scheme in other countries?

Reverse mortgages are available in the US, Europe, Australia, New Zealand and Canada. The market for this product differs from region to region. For example, the market in the US is relatively regulated. In the UK, there is a wider range of such financing schemes available compared to the US and Australia. Reverse mortgages are fairly new in Australia.

How popular are reverse mortgages in Singapore currently and why?

The concept of reverse mortgages is a relatively new concept in Singapore. As more and more Singaporeans head towards retirement, reverse mortgages can be a viable option for them to look to when looking for solutions to supplement their income. With longer life expectancy, many senior citizens are concerned about the rising costs of living and reduced income streams during retirement. This is a reality which affects everyone whether he or she is a private property or HDB flat owner.

Currently, there are already various solutions that senior citizens can rely on. For those who did not plan early and want to supplement their income during their retirement, they now can consider a reverse mortgage as an additional option.

Who should take up a reverse mortgage?

Senior citizens who have fully or almost fully paid for their property and wish to supplement funds for their retirement needs can consider taking up a reverse mortgage.

Before taking up a reverse mortgage, there are other options available if customers are looking for additional cashflows. For example, customers can choose to rent a place after selling their property. The excess funds from the sale can be used to buy an annuity product to provide regular payouts. Another option is to lease out their property for rental income. Yet another alternative is to use their excess CPF funds to invest in an annuity product for regular payouts.

What are the different types of reverse mortgages currently available in Singapore?

In the US and UK, there are various types of reverse mortgage schemes that vary primarily in their payout limits, payout patterns, processing fees and approved properties. In Singapore, NTUC Income's term-based reverse mortgage is available to both private and HDB home owners while OCBC is the only bank offering reverse mortgage for private properties that comes with two different loan options - term-based and annuity-linked - to address the different retirement preferences of senior citizens.

With the term-based option, customers will receive a monthly payout for up to 25 years or when they reach 90 years of age, whichever is earlier. However, for those who are concerned about outliving the payouts, there is the annuity-linked option. With the term-based plan, customers can expect to receive a higher monthly payout compared with the annuity-linked plan, although the latter has the added advantage of providing the customer with payouts for life.

Which scheme is better - the term-based plan or the annuity-linked plan?

This will depend on the customer's needs. For the term plan, the monthly sum that the customer receives will be higher compared to the annuity-linked reverse mortgage. For the annuity-linked plan, the customer has the assurance that the monthly payout is for the rest of his or her life although the monthly payout is lower.

After working out the amounts with the financial institution, customers should discuss with their family members before deciding on which plan to take up.

What is the amount of monthly payouts that can be obtained between the different types of reverse mortgage scheme?

The monthly payouts under each scheme will depend on several factors including property value, loan tenure and whether the property has been pledged under the CPF Minimum Sum Scheme. Gregory Chan is head of Consumer Secured Lending, OCBC Bank.

This article is written for general information only. It is not intended to provide legal, financial or professional advice or to be relied or acted upon by any persons.