In the previous series about Life Insurance, I spoke about basic aspects that consumers should take into account whilst buying insurance. In this blog, I will focus on retirement issues and in particular one solution, reverse mortgage, which is quite pertinent to Singapore.
Retirement solutions have been receiving a significant amount of attention in Singapore lately. People have been debating about solutions to provide enough for elder people such that they do not outlive their means. The situation is being further exacerbated by the fact that the life expectancy has been improving (an average Singaporean is expected to live until 83 years). In addition to the existing CPF scheme, the Government has been implementing a number of other solutions such as enhancing the current Studio Apartment (“SA”)/Lease Buyback schemes (“LBS”) and introducing the MediShield Life Scheme. In this blog, I have discussed pros and cons of another solution, Reverse Mortgage, which has been very popular in some of the western markets.
Reverse Mortgage (also known as equity release in the UK) is not a new solution to Singapore. NTUC Income had launched the product in 1994 and later stopped in 2009. The product was offered to NTUC Income’s policyholders on HDB properties. OCBC had also launched the product in 2006 and later stopped offering in 2009. The product was available to Singapore citizens and permanent residents and was offered on private properties. It is understood that the take up rate on these products was not great and therefore these were discontinued at a later date.
Reverse Mortgage is a product which allows people to unlock the value of their properties and turn them into cash. In countries where residents are asset rich and cash poor, people can use this product to plan for their retirement. In simple terms, property owners mortgage their properties to the solution provider and in return they receive right to continue to live in their properties (as long as they or their dependents are alive) and a cash lumpsum upfront. They can use this cash lumpsum to plan for their retirement or buy an annuity product to generate regular source of income.
The current SA/LBS schemes provide similar features whereby you can either sell your bigger HDB apartment to move into a smaller apartment with some cash lumpsum or you can sell the tail end of your leases. At the moment, these schemes come with a basic lease period of 20 years and above.
Clearly the above description of the reverse mortgage product sounds interesting! So why do we not see more of it and why it is not that popular? There are a few issues with launching a reverse mortgage product, particularly in Asia and Singapore:
The providers would treat the product as if they are providing a loan to customers against a security provided by the value of property that has been mortgaged. As long as the value of the property is higher than the outstanding value of the loan (including some profit margins), the product is affordable to providers.
There are a few key risks that need to be assessed before determining which financial institutions can play a role here. There is of course a risk that people outlive themselves and when you combine that with the risk that property markets or interest rate may move adversely, it becomes a significant long term risk. I personally see role for insurance companies and banks to promote such a product.
Insurance companies are in the business of taking on long term demographic risks. Therefore, reverse mortgage is a product they should be looking at as it presents unique opportunities for them in the Asian retirement markets. On the other hand, they may not be well equipped to manage long term property and interest rate risks. This is an area where they can partner with banks and look to capital markets to share the risks which they are not comfortable with.
Reverse mortgage has the potential to solve the retirement issue in Singapore. However, challenges remain from the perspective of acceptance rates from people and also in terms of the risk taking capacity of insurers and banks. A collaboration between financial institutions and the Government may provide a potential solution.