Tuesday, May 02, 2006
Thinking of going in for a reverse mortgage? Here's what you should know
The Government recently allowed homeowners above the age of 62 to generate income from their HDB flats through a scheme known as reverse mortgage. The move is aimed at helping retirees supplement their income by unlocking the value of their biggest asset.
Private property owners have been allowed to mortgage their houses since 1997.
For a retiree, a reverse mortgage linked to an annuity provides the dual benefits of cash-flow and a roof over one's head until death, said Mr Willy Lim, risk specialist at ipac Financial Planning.
A reverse mortgage is a home equity loan which allows homeowners to pledge their property for a loan from a financial institution. The funds are then used to buy an annuity plan that pays out a fixed amount of money every month to the borrower.
The loan does not usually have to be repaid during the homeowner's lifetime as the lender will take possession of the flat at the end of the mortgage period.
In a reverse mortgage, monthly payouts to the homeowner starts at age 62. At the end of the mortgage period, the lender can take possession of the house that is pledged.
However, NTUC Income, the sole financial institution offering reverse mortgages in Singapore, said that it would not immediately take possession of flats when borrowers outlive the mortgage period.
"However, monthly payments would cease," said an NTUC Income spokesperson, adding that the co-operative would take possession of a house only upon the death of a reverse mortgage customer.
So far, it has signed up seven customers around a month after the plan's launch. "Singaporeans are still familiarising themselves with such schemes," the spokesperson said.
In fact, there is talk that the three local banks may soon offer reverse mortgages too.
Once you have taken up this financing option, however, it means you will have to discard the traditional idea of bequeathing your flats to your loved ones upon your demise, said Ms Anne Tay, vice-president, Group Wealth Management at OCBC Bank.
Before taking a reverse mortgage loan, one should consider the following points and weigh the pros and cons of such schemes vis-a-vis its alternatives, said Ms Tay.
Don't expect to extract the full value of your home into the reverse mortgage. For example, your reverse mortgage quantum may be kept at 70 per cent of the total projected valuation of your HDB flat.
The monthly amount you are able to unlock from a reverse mortgage may not be sufficient to maintain your lifestyle.
As a rule of thumb, you would need at least 70 per cent of your last drawn income to upkeep yourself.
Based on NTUC Income's fixed annual interest rate of 5 per cent on reverse mortgages, an HDB flat valued at $240,000 can generate a monthly payout of up to $380 over 20 years.
The homeowner can choose to borrow less under the reverse mortgage loan, but the monthly payout may not be sufficient for a couple to live off.
If you have not finished paying off your housing loan, you may be required to pay the balance before you can unlock the value via a reverse mortgage.
The law requires that one be at least 62 years old to be eligible for a reverse mortgage. A huge age disparity between spouses could be a problem. For example, if the husband is 62 years old and the wife is 55, the couple will have to wait until the wife becomes of eligible age.
With an increasing average life expectancy, it is possible that you may outlive the reverse mortgage term. To avoid that, you may want to look for a reverse mortgage that gives you a longer-term period in exchange for smaller monthly pay-outs.
Lease tenures that are required at the end of the reverse mortgage term can create problems. For example, a flat must have a remaining lease term of 50 years at the end of the 20-year reverse mortgage.
Let us assume you start the reverse mortgage at age 62 and go for a maximum term of 20 years. Technically, your flat needs to have a remaining lease term of at least 70 years when you are at age 62.
However, if you purchased your flat at age 30 and have stayed in it since, the remaining lease term of your flat is 67 years when you turn 62. Thus, you can only go in for a reverse mortgage term of 17 years rather than the maximum of 20 years.
If the interest rates are higher when you retire, you may end up paying much more on your reverse mortgage.
If this happens, your cost of funds to obtain your replacement income may be so high that the monthly amount may dwindle.
Start planning for ways to fund your retirement when you are younger. Ask yourself: "How am I going to get a replacement income to fund my lifestyle?"
How low will we go? Check out Yahoo! Messengers low PC-to-Phone call rates.
Private property owners have been allowed to mortgage their houses since 1997.
For a retiree, a reverse mortgage linked to an annuity provides the dual benefits of cash-flow and a roof over one's head until death, said Mr Willy Lim, risk specialist at ipac Financial Planning.
A reverse mortgage is a home equity loan which allows homeowners to pledge their property for a loan from a financial institution. The funds are then used to buy an annuity plan that pays out a fixed amount of money every month to the borrower.
The loan does not usually have to be repaid during the homeowner's lifetime as the lender will take possession of the flat at the end of the mortgage period.
In a reverse mortgage, monthly payouts to the homeowner starts at age 62. At the end of the mortgage period, the lender can take possession of the house that is pledged.
However, NTUC Income, the sole financial institution offering reverse mortgages in Singapore, said that it would not immediately take possession of flats when borrowers outlive the mortgage period.
"However, monthly payments would cease," said an NTUC Income spokesperson, adding that the co-operative would take possession of a house only upon the death of a reverse mortgage customer.
So far, it has signed up seven customers around a month after the plan's launch. "Singaporeans are still familiarising themselves with such schemes," the spokesperson said.
In fact, there is talk that the three local banks may soon offer reverse mortgages too.
Once you have taken up this financing option, however, it means you will have to discard the traditional idea of bequeathing your flats to your loved ones upon your demise, said Ms Anne Tay, vice-president, Group Wealth Management at OCBC Bank.
Before taking a reverse mortgage loan, one should consider the following points and weigh the pros and cons of such schemes vis-a-vis its alternatives, said Ms Tay.
Don't expect to extract the full value of your home into the reverse mortgage. For example, your reverse mortgage quantum may be kept at 70 per cent of the total projected valuation of your HDB flat.
The monthly amount you are able to unlock from a reverse mortgage may not be sufficient to maintain your lifestyle.
As a rule of thumb, you would need at least 70 per cent of your last drawn income to upkeep yourself.
Based on NTUC Income's fixed annual interest rate of 5 per cent on reverse mortgages, an HDB flat valued at $240,000 can generate a monthly payout of up to $380 over 20 years.
The homeowner can choose to borrow less under the reverse mortgage loan, but the monthly payout may not be sufficient for a couple to live off.
If you have not finished paying off your housing loan, you may be required to pay the balance before you can unlock the value via a reverse mortgage.
The law requires that one be at least 62 years old to be eligible for a reverse mortgage. A huge age disparity between spouses could be a problem. For example, if the husband is 62 years old and the wife is 55, the couple will have to wait until the wife becomes of eligible age.
With an increasing average life expectancy, it is possible that you may outlive the reverse mortgage term. To avoid that, you may want to look for a reverse mortgage that gives you a longer-term period in exchange for smaller monthly pay-outs.
Lease tenures that are required at the end of the reverse mortgage term can create problems. For example, a flat must have a remaining lease term of 50 years at the end of the 20-year reverse mortgage.
Let us assume you start the reverse mortgage at age 62 and go for a maximum term of 20 years. Technically, your flat needs to have a remaining lease term of at least 70 years when you are at age 62.
However, if you purchased your flat at age 30 and have stayed in it since, the remaining lease term of your flat is 67 years when you turn 62. Thus, you can only go in for a reverse mortgage term of 17 years rather than the maximum of 20 years.
If the interest rates are higher when you retire, you may end up paying much more on your reverse mortgage.
If this happens, your cost of funds to obtain your replacement income may be so high that the monthly amount may dwindle.
Start planning for ways to fund your retirement when you are younger. Ask yourself: "How am I going to get a replacement income to fund my lifestyle?"
How low will we go? Check out Yahoo! Messengers low PC-to-Phone call rates.
// posted by Shajahan @ 10:34 AM 