What is reverse mortgage?
It is a scheme to provide financial security to retirees. It is an option to help the elderly to unlock the equity in their property so that they can enjoy an income stream in his retirement years.
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.
However, you have to exercise care to the terms and conditions. According to the article titled “Couple Sue Over Reverse Mortgage” published in The Straits Times on 28 July 2009, the point of contention is the market valuation of the property.
Mr and Mrs Chua's landed property was valued at S$2.1 million in 1997 and they were allowed to borrow up to 80% of its value. But after the SARS crisis in 2003, the valuation of the property dropped to S$1.1 million. This alerted NTUC Income as the loan amount had crossed the upper limit of 80%.
The original valuation in 1997 helped secured the couple's S$2,000 per month income benefit in 2004. In 2007, it was reduced to a miserable S$300 per month. Before signing the deal, the couple was advised by lawyers about the terms and conditions. So what went wrong? Assuming they understood the 'risks' involved, NTUC Income did not seem to have done the wrong thing here.
There is some missing information in the article. Nonetheless, there are a few lessons to from this unfortunate incident.
Don’ts
- Do not depend completely on a reverse mortgage to provide you with a constant income stream.
- Do not borrow the maximum allowable limit of 80%. Go for 60%-70% instead.
Do's
- Peg the valuation of your property to a value that is more realistic.
- Understand the pros and cons of the term-based plan and annuity-linked plan – the monthly payout for the term-based is higher than the annuity-linked based; the latter gives the assurance that payout will be for the rest of your life though it is lower.
- Plan early for your retirement – the 30's phase is where most people have a greater savings capacity.
- Diversify your investments – the wise saying of „not putting all your eggs in one basket? holds true in all circumstances, regardless of whether the market is up or down.
- Discuss with your family members before taking up a reverse mortgage.
Reverse mortgages do work but you need to be realistic in using this approach to fund your retirement.
