Cover Story: Helping the elderly fund their retirement

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 6, 2019 - May 12, 2019.
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Over the past decade, many ageing nations have been using home equity release to help the elderly cope with the rising cost of living. Now that the country faces the same prospects, More To Life Sdn Bhd CEO Soalen Sittampalam believes that Malaysians will also benefit from this retirement solution.

Put simply, equity release is a way for senior citizens to unlock the value of their homes by converting it into cash. Some do it via home reversion, which is a type of equity release where elderly homeowners sell their house to a buyer at a discount. In return, they receive cash and the right to live on the property rent-free for the rest of their lives.

“Generally, people need money for retirement and they do not have it. When I looked at Europe’s statistics, I realised that 70% of seniors’ wealth and retirement funds are tied up in their house, which is their primary residence. This is a big clue to how they can provide for their retirement,” says Sittampalam.

Equity release has been available in

various forms since the 1960s in the UK and for the US. It is seen as a solution for an ageing population who has to plan for a longer retirement as a result of higher life expectancy. Adding to that burden is the rising cost of living.

Malaysia is expected to become an ageing nation by next year. Malaysians’ lack of retirement savings is well noted in the reports of surveys done by various institutions. In 2017, the Employees Provident Fund found that 70% of its members who withdrew their funds at age 55, used it up in less than a decade.

“Imagine someone at 70 who has no cash and can suddenly free up RM500,000. Think about the kind of difference that can make in their lives. Some of the things people do [when they get the cash] is fix up their kitchen, buy a car, pay the down payment on their children’s house and, most importantly, pay for their living expenses, whether it is for a helper, medicine or food,” says Sittampalam.

More To Life offers home reversion to Malaysians. Sittampalam established the company this year and began reaching out to elderly homeowners last month. He has been working on the company’s business model for seven years. In that time, he researched various equity release models and reached out to the relevant authorities in Malaysia to find out what they thought about it.

Sittampalam also sought out Jon King, a veteran of home reversion plans in the UK since the 1980s, to be his co-founder. King has held several positions throughout his career, including chairman of the UK’s Equity Release Council for five years and managing director of equity release lender more 2 life Ltd for three years.

The alternative for the elderly in tough financial situations is to sell their house and move into a smaller residence. But not everyone is capable of making the move. They may have sentimental value attached to the house or prefer to retire in a familiar neighbourhood. A 2017 study by Universiti Putra Malaysia found that 77.6% of the senior citizens who were surveyed did not want to move.

“There is also a large proportion of people whose children are in another country. Or even if the children are here, they have their own homes and families. If the parents want to lead an independent life, this is an alternative for them,” says Sittampalam.

Adopting an equity release scheme, however, will require a mindset shift for Asians, who traditionally like to include properties as part of their bequest for the next generation.

“Everyone wants to leave things to their children if they can. But in this case, if they cannot because they are short of cash for their retirement, they need to do something. The cost of living is high and pensions are inadequate,” says Sittampalam.

There are other ways to navigate the situation. For example, some of the elderly in the UK who are in an equity release scheme provide for their children by using part of the cash for the down payment of another property, he says.

“Very often, what you find happening in the UK is that the parents get into the scheme, get a lump sum of cash and gift it to their children — so that the children can pay the down payment on their own place and live independently. Then, the parents’ house is no longer needed by the children.”

 

Living rent-free

More To Life adopts the home reversion model of equity release. This is unlike reverse mortgages, which are more popular in the UK and the US. The company merely facilitates the transactions and interactions between the buyers and elderly homeowners.

More To Life has a letter from the Board of Valuers, Appraisers, Estate Agents and Property Managers stating that its business does not infringe the Valuers, Appraisers, Estate Agents and Property Managers Act 1981 (Act 242) so long as it adheres to certain requirements, such as ensuring that the elderly are represented by an independent estate agent and lawyer.

To qualify for More To Life’s services, homeowners need to be at least 65 years old and must own a landed home in the Klang Valley. The age requirement also applies to a spouse living in the house. Together, they can create a joint lifetime lease.

If they decide to sell the house, the property will be listed on More To Life’s platform. The price is usually at a 40% to 60% discount of the property’s value. The discount is calculated based on the homeowner’s age and gender.

“These factors determine your life expectancy. If your life expectancy is 20 years, then that is the number of years you will live rent-free. In exchange for this, you will have a reduction in the amount of equity [cash] you can free,” says Sittampalam.

“We paid an actuarial consultant to come up with an actuarial engine. We have built a calculator into our website, where you can key in your details and it will tell you how much cash you can free [from your house]. The agreement always expires upon the last survivor’s death. So, there will never be a situation where someone is evicted.”

On comments that a 40% discount on the property is steep, Sittampalam says it is only applicable if the homeowner is still quite young. “You have to consider the fact that they will be living for many years. It is like the investor buying a car and not being able to drive it for 20 years. So, he or she must be compensated for it so that the person can live for 20 years in the house rent-free,” he adds.

“We do not do medical underwriting. It is only based on general mortality tables,” says Sittampalam, meaning that the company does not look at the health of the homeowners to determine whether they may have a shorter life expectancy.

If there is still a mortgage on the property, the homeowner can offset this with the cash he receives. In addition, he can list the property on the platform at any value he wants, regardless of the current market value.

“This asking value is adjusted downwards based on an actuarial calculation [based on age and gender] to arrive at the asking price. Following a satisfactory inspection by registered investors, there will be an opportunity for both parties to negotiate the price through the estate agent,” says Sittampalam.

Once a buyer expresses interest in a property listed on the platform, he can arrange for a viewing and liaise with an independent property agent who will represent the elderly homeowner. After the property title is transferred at the end of the deal, a lifetime lease agreement is signed.

Anyone can live with the elderly tenant during the lease. However, if it is not the spouse who signed a joint lifetime lease, the person will have to sign a waiver stating that he or she will have no interest in the house following the death of the tenant(s).

What if the elderly tenant changes his mind? “He can buy back the property. But that is subject to the landlord’s approval,” says Sittampalam.

He encourages the elderly to involve their children in the decision. “They do not have to do so. It is their choice. But we encourage it because in terms of estate planning, it is helpful to have the children involved in the conversation,” he says.

 

Protecting tenant rights

To protect the elderly tenant, the buyer cannot interact with him directly during the lifetime lease. Any correspondence must take place through More To Life.

“As part of the plan, we enter into a legal agreement with the buyer and seller. The two parties must never interact directly during the entire period of occupation. It is a civil arrangement. But in addition to that, under the tenancy laws, the tenant is allowed to have quiet enjoyment of the property,” says Sittampalam.

More To Life vets potential investors who are interested in viewing and buying the properties.”We collect identification documents and register all potential investors before inspections, and we encourage mostly participation of institutions and high net worth investors,” he says.

There are a few conditions that could cause the lease to be terminated. This could happen if the elderly tenant abandons the property for six months or more, allows it to fall into disrepair or does not pay for the outgoings, which include the quit rent, assessment and building insurance.

Another factor is if the tenant renovates the structure of the house without getting the owner’s permission. Sittampalam emphasises that the agreement states permissions cannot be unreasonably withheld on the landlord’s side.

But what if the elderly tenant has a medical situation and has to temporarily receive care elsewhere for six months? He says that is alright, as long as the house is not permanently abandoned. More To Life does an annual inspection of the property to observe its conditions.

“If a house is abandoned, it is generally very poorly maintained and the value of the house gets destroyed. Basically, we do not want a situation where they enter the scheme and just leave the house,” says Sittampalam.

The definition of “disrepair” is whether the house is habitable, he says. If the garden is overgrown, for example, it does not impinge on the habitability of the house. “But if the roof has fallen, then it is not habitable,” he adds.

Sittampalam estimates that the monthly outgoings are RM150 per month for a RM1.2 million terraced house in the Klang Valley. If the tenant cannot pay these expenses, then the lease will be terminated. In the beginning, the tenant also has to pay the real estate agent’s fees, lawyer’s fees and Real Property Gains Tax.

If the tenant chooses a More To Life panel lawyer or estate agent, he can receive a discount. The law firm on its panel is MahWengKwai & Associates and the estate agent is Kim Realty.

 

Why invest?

According to Sittampalam, many local wealth managers with high-net-worth clients have expressed interest in becoming buyers. This is due to the appreciation of house prices in Malaysia, particularly in the Klang Valley.

According to data from the Valuation & Property Service Department cited by Sittampalam, landed properties in the Klang Valley appreciated 9% to 15% per annum from 2010 to 2016. “The properties are fully tenanted and well maintained,” he adds.

More To Life only accepts listings of landed properties because their price appreciates over time. Of course, the buyers must be patient as they may have to wait 15 to 20 years before they can access the properties.

“Typically, they are investing for the next generation. But our plan does allow for a secondary listing. So, if you need cash, you can relist it on our website,” says Sittampalam.

“The discount will have unwinded and the property will have appreciated a bit. So, you will make a return on that. The lease and tenancy agreements remain intact and are not affected by the change in ownership.”

Is it a better option than buying a new property in the Klang Valley? Sittampalam says this is just an alternative for buyers. Through this platform, investors can buy a landed property in the Klang Valley for almost half the price.

“If you do that [buy a new house and rent it out], you get yield. Through ours, you do not get yield. But the rent is essentially prepaid [through the discount on the house price]. So, it is a different proposition altogether,” he says.

In the UK, many investors of home reversions are institutional investors and insurers, he adds.

To purchase a property on this platform, investors have to fork out 3% of the final sales value as a facilitation payment and a 0.2% recurring annual fee during the period of the lease (to pay for the annual inspections, among others).

Sittampalam launched More To Life in March via several media channels. There is currently one listing on the website as at Apr 29.

“It is a new business. We already have venture capital backing and are trying to grow the business. There will be a need for further capital. We will probably do another round of fundraising before the end of the year,” says Sittampalam.

He also has plans to expand in the region. “Equity release is widely available in the developed world, but it is not prevalent in Asia. So, we plan to start with Southeast Asia before expanding to the rest of Asia as we see a gap in the market.”

 

 

Creating the first home reversion product in Malaysia

Soalen Sittampalam, CEO of More To Life Sdn Bhd, has had a varied career. He held investment and corporate finance roles at Khazanah Nasional Bhd and Usaha Tegas Sdn Bhd for about five years. He also spent three years at DSH Management Sdn Bhd, his family-owned community hospital business.

The idea of launching a home reversion product came when he was on holiday in Italy with his father. “My father mentioned something called a home equity release, that it was being launched in Australia. I knew about the ageing population and pension crisis because I did a Master of Science degree in health management at Imperial College Business School in the UK. So, I latched on to the idea as something with the potential for me to do well by doing good,” says Sittampalam.

His research on the situation faced by Malaysian retirees confirmed his belief that there was a need for such a solution in the country. “When we first started, I made a presentation to the then Employees Provident Fund CEO Datuk Shahril Ridza Ridzuan as well as the head of investments at Khazanah,” says Sittampalam.

“We wanted them to set aside some money to buy these houses. They were interested, but said we had to develop a pipeline of houses and prove ourselves as a fund manager. So, we focused more on being an arranger or a platform on which buyers and sellers could transact.”

He placed an advertisement in a UK newspaper and found Jon King, who would become co-founder of More To Life. King’s experience in launching similar products in the UK was invaluable to Sittampalam. The company currently has two investors, one of whom is Asgari Stephens of Intelligent Capital Sdn Bhd.

According to Sittampalam, he also engaged with Bank Negara Malaysia on how his product would be regulated if he were to introduce it in the country. However, the central bank told him that it only regulated banks and insurers. So, he approached the Board of Valuers, Appraisers, Estate Agents and Property Managers, which comes under the Ministry of Finance.

“We engaged with them for nine months and they finally gave us the green light. Part of the approval was that we needed to involve an independent estate agent and an independent lawyer to represent the elderly homeowner,” says Sittampalam.

More To Life is offering the first home reversion product in Malaysia. But the first to announce a reverse mortgage loan for homeowners aged 65 and above was actually Malaysia Building Society Bhd in 2004, according to reports. However, there has not been much news on the product since.

“When we talked to Bank Negara, it was very interested in introducing equity release. It has actually done two study visits to the UK and met with our contacts there,” says Sittampalam.

“We heard it decided that reverse mortgages were not suitable for Malaysia because there was a risk to the financial system. If property prices collapsed and you sold the property, it would not be enough to settle the loan, thus resulting in a situation known as negative equity.”

By comparison, More To Life’s business model is only a real estate transaction that does not involve loans. “There is really no scope for any sort of exploitation on our part. We are just a platform,” he says.

“In terms of the real estate transaction, the elderly are well protected by the estate agent and lawyer. So, they cannot be exploited in the process.”

 

 

Home equity release products explained

Equity release allows the elderly to access the equity tied up in their house. It is mainly used to help them fund their retirement. The most popular forms of equity release include the reverse mortgage, lifetime mortgage and home reversion.

Reverse and lifetime mortgages involve the issuance of a loan, which the elderly homeowner takes using his primary residence as collateral. The payment of the loan, inclusive of interest, generally only occurs after the death of the homeowner.

There is more flexibility here as the heirs can choose to pay off the loan to keep the house. They can also sell the house to pay off the loan.

If the house sells for more than the amount owed, the homeowner or heirs will receive the balance. They will not have to pay the difference, however, if the house sells for less than the amount owed. Reverse and lifetime mortgages are popular in the UK and the US.

Home reversion, which is the model More To Life Sdn Bhd has adopted, involves the sale of the house to the service provider in return for a lump sum or regular payments. The elderly tenant can continue living rent-free in the property until his death, provided that the house is insured and well-maintained.

 

How are they regulated?

A quick search on Google brings up articles that warn consumers about reverse mortgages. Some argue that the costs and risks associated with these outweigh the benefits. In addition, the interest cost can grow quickly to become debt for the homeowner as the rate is often higher than those of ordinary mortgages. Others take issue with the reverse mortgage lenders’ aggressive marketing practices that target the elderly.

This was a concern in the UK and the US more than a decade ago. In the US, a bill that protects seniors from predatory reverse-mortgage lending became law in 2009. One type of product is insured by the Federal Housing Administration.

The UK Financial Services Authority began regulating lifetime mortgages in 2004. Under pressure from the public, it started regulating home reversion plans later that year.

In Malaysia, there are currently no regulations for equity release products. According to a 2017 article by EdgeProp.my, several property experts suggested that relevant laws and regulations should be in place before a reverse mortgage product can be launched.

 

Avoiding mis-selling

More To Life CEO Soalen Sittampalam observes that the regulations in the UK came more than 40 years after the first products were launched. That was because there was a wide variety of equity release products available in the market being distributed by intermediaries, thus creating scope for mis-selling.

“The complexity was huge. There must be some kind of systematic way to present information to the elderly homeowners and not exploit them. All the laws around equity release in the UK are with the aim of avoiding mis-selling. In Malaysia, we are the first, so there are currently no regulations. But ours is a very simple product,” says Sittampalam.

Also, More To Life offers a home reversion product, not a reverse mortgage. So, it does not involve a loan issuance. It is merely a real estate transaction, he adds.