Reverse mortgages in the spotlight, offer option to ease cash woes

They offer option to ease cash woes of low-income retirees with private homes

The plight of asset-rich but cash-poor Singaporeans has revived talk that reverse mortgages could prove a solution for some people.

Being asset-rich but cash-poor affects a number of retired people here. They tend to own their own home but have a limited income. They have few options other than renting out their rooms for some ready money or downgrading to a smaller house, but selling the family home is often seen as a step too far.

Financial advisers say reverse mortgages could allow such people to unlock equity tied up in property so they can generate cash instalments to make their retirement years easier while being able to remain in their own home.

OCBC Bank and NTUC Income began offering such mortgages in 2006 but they were discontinued due to a lack of demand.

Only 38 private property and 10 HDB reverse mortgages are still being serviced by NTUC Income. Figures from OCBC Bank were unavailable.

The concept is simple: A borrower, typically a retired home owner, can convert some of the value in his home into cash while still living in it.

Unlike a traditional mortgage, the home owner does not make any payments but receives a monthly payout from the financing institution.

When the reverse mortgage reaches the end of the pre-defined loan period, it becomes due with interest, which the bank collects by selling the home. The same goes when the home owner dies, sells the home or moves out.

While HDB home owners have access to a similar scheme called Lease Buyback, private property owners do not have the option, but financial consultants The Straits Times spoke to said reverse mortgages should be given another chance as they would be a good addition to the mix of home monetisation options available.

They would provide low-income retirees with "a practical and reasonable option", said SingCapital chief executive officer Alfred Chia. He noted that there may be some people who live by themselves with no future generations to take care of them so it is "always good (for them) to have more options".

Mr Jeff Lee, executive director of Synergy Financial Advisers, said reverse mortgages should be made available here, given the fact that the Government has done much to emphasise the need for home ownership.

But such schemes are likely to still be viewed as "last resort".

"The uncertainty of living beyond the loan period in a reverse mortgage and being chased out of the house can be quite unnerving," added Mr Lee. "At that age, most people would want to die in their homes instead of being forced to move. They would 'pawn' their homes only if they were really left with no choice - no cash, no money in their CPF, only their property."

Volatile interest rates may also be a concern for home owners, said Mr Chia.

"If interest rates spike, this may eat into the monthly payout and expedite a loan breach. The home owners will then find themselves with nowhere to go. As far as Asians are concerned, they prefer to leave behind assets for future generations," he said.

Some elderly people in private homes can certainly face hardship.

In Opera Estate in East Coast, for example, there are at least five households receiving social assistance from ComCare, the Government's main fund to help the needy and low-income families. But most of them would not have given a second thought to selling their homes or taking up a reverse mortgage, said Opera Estate's neighbourhood committee chairman Chris Chen.

"They have lived here for years and there are a lot of memories attached to the house, to the neighbourhood. It's not so easy to let go of their properties."

While reverse mortgages did not take off previously, Mr Lee believes that things might change if financial institutions could provide borrowers, especially those who outlive their life expectancy, with "more assurance".

"For instance, banks could offer home owners some form of insurance along with the reverse mortgage, so that they don't have to worry about being forced out of their homes once the loan period is up," he said. "But this will work only if there are enough home owners on board the scheme in the first place."

tsjwoo@sph.com.sg