Reverse Mortgage for retirees

QUESTION FROM JOURNALIST"

Dear Mr Tan,

I am writing a feature article on home equity. 47 per cent of total assets in the household sector are invested in residential properties.

1) Can you tell me more about Income's proposal for a reverse mortage plan that will suit HDB flat owners?

2) What are the main obstacles to Singaporeans monetising their assets, namely their HDB flats? What would you say are the best ways to overcome these obstacles?

---------------------------------------------------------

REPLY:

At present, HDB does not allow its flats to be used for reverse mortgage. This is the main obstacle. If HDB relax on this rule, some owners may wish to use their HDB flat to get a reverse mortgage.

You have to ask HDB for their reason to impose this rule. It has been the rule for many years. HDB is not prepared to relax this rule up to now.

If HDB relax its rule, the financier will still have to address the following obstalces:

- how much should be granted as a monthly income?
- what interest rate to charge?
- how long to grant the loan?
- what happens when the property value drops below the borrowings plus interest?
- should the scheme be insured, ie guarantee payment of the income for the lifetime of the mortgagee?
- who owns the residential interest in the property at the time of death of the mortgagee?

The reverse mortgage offered by NTUC Income is an "uninsured" mortgage. It works as follows:

- we agree on a monthly payment to the mortgagee
- interest is charged at the current rate (around 4-5% per annum)
- so long as the total borrowings, with interest, does not exceed 80% of the value of the property (ie the 20% is to be a buffer), we will contiue the arrangement
- when the total borrowings reach 80% of the value of the property, we ask the mortgagee to make other arrangements, eg to sell the property and repay the loan
- if a small amount is taken out monthly, the arrangement is likely to continue for 20 years or longer
- when they sell the property, they repay the loan and keep the balance.
- if they die, the property is sold, and the balance of the property, after repaying the loan and interest, will go back to the estate.

In practice, we believe that many mortgagees are likely to sell their property after 5 or 10 years and to repay their loan. They can find another place to stay, eg rent a flat, stay with their children, or stay in a home for the elderly.

We also give an option for the mortgagee to allow a family member, eg son or daughter, to take over the property and the loan.

-----------------------------------------------------------

Here are some examples of the amount that can be drawn down:

- Non-insured, fixed period loan (20 years)
- All flat owners (fully paid up) over age 70 are eligible
- Interest rate 5% fixed
- Sample monthly drawdown amount (0.2% of initial property value)

Flat type   Property       Monthly     
            Value           Drawdown
   
3-room      $160,000       $320   
4-room      $240,000       $480   
5-room      $320,000       $640    
Exec Apt    $480,000       $960   

- Borrowers can continue to stay in flat
- Early repayment and downgranding to smaller flat allowed (repay loan)