Should You Take A Reverse Mortgage in Singapore?

A reverse mortgage is a type of secured loan for seniors or older homeowners ages 65 and older against their house. It could be an attractive option for older adults in Singapore who own their home outright and look to monetise their housing equity in the face of retirement and problems related to ageing.

And what if we say that you don’t have to pay monthly mortgage payments when taking up a reverse mortgage loan? Sounds too good to be true? Well, don’t make a decision as yet.

If you are interested in a reverse mortgage, this article will help you understand the pros and cons of this loan type so you can make the right financial decision for you and your family.

What is the point of a reverse mortgage?

Some people might wonder why would anyone want to borrow against their home, which they have worked so hard to fully pay off. Some raised concerns about whether older adults will struggle to repay their loan at the end of the loan tenure. Well, let’s see how a reverse mortgage works in Singapore.

A reverse mortgage allows retirees who have already paid up their property mortgages to borrow money from a bank against the home value without having to sell it. Especially people who have a good chunk of home equity but not enough liquid capital or savings. It is a Home Equity Conversion Mortgage type loan; don’t confuse a reverse mortgage to be the same as a “home equity loan” or “cash-out refinancing”.

Unlike a regular home loan where the homeowner makes regular monthly repayments to the lender bank in case of a reverse mortgage, the lender bank pays the homeowner. The borrowed amount is topped up as a lumpsum into the customer’s CPF retirement accounts, which is then used to raise the monthly payouts received under CPF Life.

For example, let’s say an older homeowner owns a house worth $400,000, which has been fully repaid. He has now retired and does not have a regular source of income for daily expenses. It is not wise to sell the house as it would leave him without one to live in. Taking up a reverse mortgage would allow him to receive a lumpsum amount (or regular cheques) for daily expenses while continuing to live in his house.

Although, such a loan comes naturally with interest. At the end of the loan tenure, you need to repay the full loan amount received with interest, usually by selling the house. Note that the borrower can sell their home at any time to repay the loan without incurring any early payment penalty fee.

Like any mortgage or financial product, a reverse mortgage comes with its own pros and cons. Since there are no restrictions on how loan proceeds can be spent, a reverse mortgage loan can provide financial freedom and flexibility during retirement.

It is a good idea for seniors looking to add additional retirement income by tapping into their home’s equity rather than pulling from their liquid assets. When utilised effectively, it can be a viable solution that promises peace of mind along with a financially stable retirement.

But bear in mind that you are using your home equity while you are alive. This means after your death, your heirs or family members will receive less of an inheritance. Additionally, note that your needs or interests may change as you get older, which may cause you to regret taking a reverse mortgage a bit too early in your retirement years.

What are the benefits of a reverse mortgage?

Usually marked to seniors, a reverse mortgage can prove beneficial and suit their lifestyles in several ways. For example, if you are an individual or couple looking to make home improvements for ageing in place, a reverse mortgage can help pay the renovation/improvement costs. With a reverse mortgage, retirees can set up a stable income source to cover their living expenses.

Some older homeowners could use their reverse mortgage proceeds to pay for in-home care costs and reduce the caregiver burden often shouldered by other family members. Others may simply keep the loan proceeds for an unforeseen health emergency or a rainy day.

The best part is seniors are able to monetize their property without selling it. Most older adults don’t want to leave off a place or home they have lived in for most of their life. Neither do they feel comfortable renting out their property nor living with strangers. Plus, there are hardly any other loan options that allow a 30-year loan tenure when you are in your 60s, 70s or even 80s.

Whether you choose to get a lumpsum amount or a steady stream of income from the bank, you help take the stress of supporting you after retirement off your children.

Why would you be turned down for a reverse mortgage?

Of course, you can be turned down for a reverse mortgage. One of the reasons is when you fail to meet any of the following requirements:

• A borrower must be 65 years old or more;
• Your private property loan must be fully paid up;
• You must be residing in the property as your primary residence;
• You must maintain home insurance and property tax payments;
• If your property is leasehold, it must have at least 30 years left on the lease.

Retirees who fulfil all the above requirements can usually get a reverse mortgage. Interesting, there are no minimum income or credit score requirements for a reverse mortgage as it involves no monthly payments to the lender.

However, a reverse mortgage may not be the best solution for everyone. It requires careful planning and must be considered only after you have done your due diligence. Note that there are some alternative options to reverse mortgages, which are worth exploring, especially if you think a reverse mortgage isn’t the best option for you.

Refinancing your current mortgage. Refinance home loan to lower the interest rate, decrease the size of your monthly payments and build equity in your home faster. Your home equity acts like an asset for you and your heirs.

Taking out a home equity loan. This type of loan is paid to you upfront with one lumpsum payment.  You will be required to make fixed monthly payments throughout the loan tenure. It is a less expensive alternative to a reverse mortgage but you risk foreclosure if you can’t make the monthly payments.

Lowering your expenses. Another way is to take advantage of the different local and state programs that could help senior or retired homeowners lower their daily living expenses.

Selling & downsizing your home. If you don’t have any special reason to stay in the same house, you should consider downsizing to a smaller one. By doing this, you can use some of your proceeds for the purchase and keep the remaining money for other purposes. A smaller house also means lesser property taxes and maintenance costs.

If you are a senior citizen and unsure whether a reverse mortgage is the right loan product for you or not, check out the list below. Are you a retiree who:

• Wants to age in place;
• Wants to supplement their retirement income;
• Owns a home that is increasing in value considerably;
• Plans to stay in your house for a long time;
• Wants to pay off an existing home loan;
• Wants to stay protected if the loan balance exceeds your home’s value;
• Looks to bring mental peace and financial security to post-retirement life.

Do you pay back a reverse mortgage?

As discussed, a key difference between a reverse mortgage and a conventional home loan is that you don’t have to make any monthly payments. And you can continue to live in your home for life. The loan amount is paid back when the borrower passes on, permanently moves out (including into aged care) or sells the home.

Once the house is liquidated, the sales proceeds go towards paying the loan amount which has been withdrawn. Any balance of the sale proceeds is passed to the borrower’s heirs or whatsoever their will or trust states. Please note that no debt will be passed to the heirs even if the loan balance exceeds the home value at the time of loan maturity.

When the borrower passes on or moves out, the mortgage is payable in full. If the house is sold off, the sale proceeds are first used to pay out the lender and the rest is received by the borrower. If you can’t pay off the debt, the lender has the right to sell the home to recoup the debt.

Read also: What happens if you can’t pay back your home equity loan?

Can you lose your house with a reverse mortgage?

The short answer is yes – you can lose your house with a reverse mortgage. If things go wrong, you risk losing your home. However, there are only specific situations when such a thing can happen.

With a reverse mortgage, you must keep up with the property insurance, taxes, maintenance costs, etc. Failing to do so will result in foreclosure by some lenders and they may ask you to immediately pay the loan in full. If you don’t, or can’t, you may lose your home.

Some lenders may also rule you in default on the loan in case of bankruptcy or if you fail to comply with any terms of the loan agreement like not living in the house as your primary residence, moving out of the house and others. In case you decide to move to a new place or even to an assisted-living facility post-retirement, you are required to pay back the loan in full.

When should you not get a reverse mortgage?

A reverse mortgage may seem like an enticing product if you have retired or close to retirement and struggling with daily living expenses; it is not the best option for senior homeowners out there. Here are the cases when you should refrain from considering a reverse mortgage:

A reverse mortgage reduces your equity in the home, which means your heirs will be left with less inheritance from your estate. So, if you plan to leave your house to your children, spouse or relatives when you die, a reverse mortgage might not be the best plan out there.

Taking up a reverse mortgage is not a good decision if you are planning to move elsewhere in the near future, which means changing your primary residence. This also includes moving to an assisted living facility. This is taken as defying the terms of the loan agreement and may result in foreclosure by the bank.

The maximum tenure of this loan is 30 years or until the youngest co-borrower reaches the age of 95. You will have to pay back the entire amount borrowed at the end of the loan tenure. In case of your death, your home will have to be sold to repay the reverse mortgage. If you have a spouse (who isn’t a co-borrower) or other family members living with you in your home, they all will have to vacate the home.

Additionally, reverse mortgages come with higher interest rates, fees and mortgage insurance costs. If there is even a chance that you may default on the loan, a reverse mortgage is likely not the best option.

Make sure you weigh the risks and rewards carefully and consult with your trusted financial or mortgage advisor on whether a reverse mortgage is a right choice for you based on your situation.

Are there reverse mortgages in Singapore?

Please note that reverse mortgage isn’t a novel concept. Reverse mortgages have been around for many years in different countries, such as the USA, UK, Australia, Hong Kong, etc. In fact, they have served certain sections of society wonderfully there, unlike Singapore.

In Singapore, NTUC Income, an insurance firm, first began offering such mortgage schemes in 1997 for private homeowners. In 2006, OCBC Bank partnered with NTUC Income to offer reverse mortgages for owners of HDB flats. But only 24 households signed up for it.

Later in 2009, both of them discontinued the product due to low demand. The take-up rates for previous reverse mortgage schemes were quite low. Firstly, the terms and conditions laid out for borrowers were quite complex, and secondly, lenders sought properties having long remaining leases as collateral, which resulted in fewer households being eligible for a reverse mortgage.

On 16 August 2021, DBS launched the new attractive reverse mortgage product with a CPF twist – DBS Home Equity Income Loan. This type of loan – a first in Singapore – allows seniors to borrow against their fully paid private residential properties and top up their CPF Retirement Account (RA).

The borrowed amount is then used to raise the monthly payouts received by these customers for life through CPF Life (Singapore’s insurance annuity scheme). Once the CPF RA is topped up with a lumpsum payment, the customers have to apply to the CPF Board to get higher monthly CPF Life payouts.

Singaporeans and permanent residents from 65 to 79 who struggle with insufficient retirement funds are taking it up.

This reverse mortgage loan comes with a fixed (although higher) interest rate of 2.88%, which allows older homeowners to project the final repayment amount a lot easier. Also, no monthly loan payments are required. The interest accrued will be repaid along with the principal amount on the loan’s maturity.

This latest reverse-mortgage solution is suitable for “asset-rich, but cash-poor” seniors who are comfortable with CPF and welcome a monthly payout scheme. In Singapore, there are a lot of ageing property owners looking for monetisation options in preparation for their retirement.

Such a financial product could be a viable way for seniors to raise money for daily living expenses and have a secure retirement.

Can I use my house as collateral for a personal loan in Singapore?

Using your house as collateral means your house acts as a safety net for the lender extending the loan. When you take up a ‘secured’ home loan in Singapore, the lender has the right to seize your house to help compensate for their financial loss in case you fail to repay the loan in full within the agreed time.

However, it is not so in the case of a personal loan. A personal loan is a form of ‘unsecured’ loan, which means you don’t need collateral. This means that if you somehow fail to pay back your personal loan in time, you don’t actually stand to lose any assets, in this case, your home.

When you put up your asset (car, home, bonds, etc.) as collateral, it becomes an equity loan. In the case of home equity loans (HELs), the amount you can cash out as your home equity may be different from lender to lender.

Mostly, lenders allow borrowers to take out up to 75% of the home’s appreciated value. However, the final loan amount is calculated by subtracting any outstanding loans along with CPF savings used to pay for your home.

• When you should opt for a HEL

A home equity loan allows you to borrow money from a bank in case you urgently need cash for a large expense, such as home renovation, sending your children for education overseas or even purchasing a vehicle by some people. A home equity loan is also suitable for consolidating other debts with high-interest rates, dealing with a financial emergency, or investing in risk-free, higher-return products.

• When you shouldn’t opt for a HEL

A home equity loan certainly isn’t a worthy choice if the property used as collateral is the sole property you own. You are risking the roof over your and your family’s head by doing this. If cashing out the equity of your home doesn’t make sense to you, you should be looking for other mortgage alternatives.

Final Thoughts

A reverse mortgage is a useful financial instrument that can release housing equity to help finance an older adult’s retirement. It could be a valuable product for asset-rich but cash-poor older homeowners looking to liquidate their housing assets and age in place.

As with all crucial financial decisions in life, one must comprehend the nature of the product and take help from a qualified mortgage consultant to rightly gauge your retirement needs and risk tolerance before making a final decision on reverse mortgages.