Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on February 7, 2022 - February 13, 2022

By and large, retirees, especially those above the age of 65, are asset rich but cash flow poor.

They depend on the returns from the Employees Provident Fund (EPF), their pension or returns from other forms of investment for their day-to-day expenses. The more fortunate ones are given a monthly allowance by their children.

But the majority of those who have drawn down on their EPF funds during the pandemic will not be able to depend on a regular sum from the provident fund for their subsistence when they retire.

Adding to their problems is the growing trend of children leaving their elderly parents to fend for themselves financially.

For most retirees, their biggest asset is their home. They would have spent a large part of their monthly income to pay off the mortgage on their house. Some use part of their EPF or gratuity to settle their housing loans when they reach 55.

But while their home is their most valuable asset, few retirees would monetise it when they run short of cash after their retirement.

This is because they have an emotional attachment to their home, where they have lived for most of their lives. It is often left as an inheritance for the next generation. The practice of treating the family home as an inheritance is an integral part of Asian culture.

That is why there is an air of scepticism over Malaysia’s first-ever reverse mortgage scheme called Skim Saraan Bercagar (SSB), which was launched recently. The scheme by Cagamas Bhd allows those aged 55 and above to borrow against the value of their home, provided it is free from mortgage.

Towards this end, the National Mortgage Corporation, together with the EPF and Credit Counselling and Debt Management Agency (AKPK), has set aside RM100 million to fund the initiative, which kicked off in the Klang Valley last month.

Borrowers under the reverse mortgage scheme are charged a flat 5% annual interest rate for the amount that they have utilised. The payments will be in the form of monthly payouts and will continue for their lifetime.

In other countries that offer similar schemes, the interest rate is not fixed. It is a floating rate and the repayment varies with the fluctuations in the borrowing cost.

The broad terms of a reverse mortgage scheme are that the retiree does not need to pay back the loan and the financier recovers the amount due from the disposal of the property or from the next of kin. If the proceeds from the sale are higher than the amount outstanding, the balance is given to the next of kin.

The difference in the Cagamas reverse mortgage scheme is that there is no recourse to the retiree’s estate in the event that the proceeds from the sale are insufficient to cover the outstanding amount that the retiree has received.

If there is no recourse to the estate, what kind of reverse mortgage are we looking at here?

A retirement planner says the amount allowed to be borrowed under the scheme is probably lower than normal.

In other countries, the amount that retirees can monetise on their home varies between 25% and 50% of the property’s value. The older the retiree, the higher the value that the lender would be prepared to offer. Apart from age, the retiree’s health profile and other safeguards provided to the lender determine the amount made available.

Based on the experience in South Korea, Japan and the US, it takes time for people to understand and become comfortable with reverse mortgage schemes. Apart from the culture of leaving an unencumbered inheritance for their children, there is a fear of getting tied to a contract without understanding the clauses that protect the retiree and the financier.

Examples in more developed countries show that retirees are not fully aware of the hidden charges and conditions that come with the mortgage.

For instance, the insurance costs can be high. And there could be clauses that compel the retirees to maintain their home to a certain standard and that the home be their permanent place of residence.

Retirees are also unaware of the power of compounding interest, which can be high over a long period of time and which can wipe out the value of the home.

Setting the right price for the house can be a messy affair. Valuations of lenders and borrowers tend to differ, with the former putting lower prices to mitigate the risk.

This is why reverse mortgage schemes are sometimes viewed with scepticism.

Borrowers and their next of kin need to know exactly what they are getting themselves into for the scheme to gain acceptance in Malaysia, where it is offered only by Cagamas in collaboration with the EPF and AKPK.

The broad terms have been spelt out. The objective of the scheme is to address the issue of Malaysia becoming an ageing society by 2030, when 15% of the population — or 5.3 million people — will be above the age of 65.

At the core of any reverse mortgage scheme is an understanding of the dynamics of the housing market. The valuation of houses is not a science. Property is an asset that tends to go up most of the time. Generally, the price of landed property tends to double over 10 years. Property prices tend to go down a little or remain steady in a downturn.

A reverse mortgage scheme works well in a vibrant housing market that has an active secondary market. All stakeholders could be happy with the outcome.

But when there is a downturn, the outcome may not be good for some parties, especially the borrowers.


M Shanmugam is a contributing editor at The Edge

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