Reverse Mortgage and Retirement Planning
From Financial Literacy Wiki
What is a Reverse Mortgage ?
Reverse Mortgage is a financial scheme which enables a flat owner to mortgage his/her flat to a bank or financial institution for cash advances without having to move out or sell their property. The borrower may choose to receive either in a lump sum or a series of regular monthly income.
How is a reverse mortgage different from a traditional home loan ?
In a traditional home loan, customers make monthly repayments to the lender (i.e. bank or financial institution). But in a reverse mortgage, customers receive monthly payouts from the lender. The loan is repayable when the property is sold, usually upon death of the borrower or expiry of the mortgage tenure.
When does reverse mortgage get recall?
Reverse Mortgage is usually being recalled by lender upon :
- Expiry of the mortgage tenure or
- Up to age 90 of the borrower (usually based on the youngest borrower) or
- Upon death of the owner or
- Sale of property or
- The principal outstanding and accumulated interest of the loan reaching 70% of the property value whichever comes first.
The concept of reverse mortgage in Singapore
The reverse mortgage scheme was brought up by the government to provide another option for the growing number of senior citizens in Singapore as a means for them to derive some income from their homes to meet their daily expenses during old age, without having to move out of their homes.
The introduction of reverse mortgage in Singapore
Reverse Mortgage is made available in Singapore since 1994 by NTUC Income. The scheme was made available for private property owners. Beside NTUC Income, OCBC Bank is the other financial institution to offer reverse mortgages for homeowners of private properties.
NTUC Income launched reverse mortgage on HDB flats shortly after HDB annonuced its relaxation on regulations in March 2006 to allow elderly HDB home owners to take up reverse mortgage on commercial terms offered by banks and financial institutions.
Because reverse mortgage may not be suitable for all elderly lessee and it affects their ability to bequeath their property to their kids, HDB requires the following to be done:
- HDB requires that the lender advises & explains to the elderly lessees on the costs, implications and risks of the reverse mortgage before they enter into any agreement.
- Next-of-kin must be informed about the elderly homeowner’s decision to mortgage the property. Thus, HDB requires that the advisory process be witnessed by the family members or next-of-kin.
Before taking up the reverse mortgage, please enquire from the lender how such a loan can end and what happens in each scenario. For instance, when the homeowner dies and the house is sold, what happens to the difference between the selling price of the house and the loan amount.
For more information on reversed mortgage on HDB flats, please refer to HDB website
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 mortgage available in Singapore ?
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.
