Roll-up mortgage a better option for asset-rich retirees

Term loans, in whatever form, entail collateral, but the report on Hong Leong Finance's scheme for retirees did not include any mention of it (HLF targets asset-rich retirees with new term loan; March 23).

If the retirees are using their paid-up property as collateral, they would, in fact, be financing their spending via debt.

Should the retirees overspend and be unable to pay the term loan with interest, they could forfeit their homes.

With regard to the Housing Board's Lease Buyback Scheme, some finance companies currently offer reverse mortgages that allow the retirees to borrow money using their flats as security without having to make regular repayments, unlike a term loan.

The loan is repaid when the house is sold or the owner moves into a nursing home or dies.

The outstanding balance will increase over time but so will the value of the property.

However, reverse mortgage providers stipulate a minimum interest rate, and regardless of how low mortgage rates go, retirees may still be charged the rate at which they signed up.

A better solution is "roll-up mortgage" schemes, which are now common in other countries.

These work like a reverse mortgage, except that the retirees would not be required to pay interest during their lifetime.

Instead, interest is added to the original loan on a compounded basis and is repaid when the property is sold or when the owner dies.

As a safeguard, regulators require a "no-negative equity" guarantee clause, which protects the retirees from having to owe more than what their property is worth.

The Monetary Authority of Singapore, together with the Association of Banks in Singapore, should come up with new and innovative products to help retirees who are asset-rich but cash-poor.

Any income derived from the schemes should also be tax-free, since the retirees are unemployed.

As with any financial scheme or product, sound advice should be provided to ensure that the retirees understand all the pros and cons.

Francis Cheng

A version of this article appeared in the print edition of The Straits Times on March 25, 2017, with the headline 'Roll-up mortgage a better option for asset-rich retirees'. Print Edition | Subscribe