Reverse Mortgage

The Reverse Mortgage – A Godsend Or A Millstone? – Finance and Banking

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It is reported in the article, “Weighing the Need for a Reverse Mortgage“, Published in StarBiz on 15.

The article also highlighted that 70% of contributors who withdraw their EPF dues by age 55 will use up their savings within a decade of retirement.

In the same article, Datuk Chung Chee Leong, the president and chief executive officer of Cagamas Berhad (the National Mortgage Corporation of Malaysia) said that Cagamas intends to launch its reverse mortgage program later this year to tackle the income insecurity of the elderly.

In this article, we provide insights into certain aspects of a reverse mortgage.

What is a reverse mortgage?

Similar to a traditional home equity mortgage, a reverse mortgage is a loan that is secured against immovable property. However, unlike a traditional mortgage, a reverse mortgage does not require the homeowner to make loan repayments during the life of the mortgage. Instead, the entire loan balance falls due when the borrower dies, moves away for good, or sells the home.

With a reverse mortgage, the mortgagee receives either monthly or other regular payments during the life of the mortgage, or a lump sum payment for specific purposes, such as: B. carrying out repairs to the property.

What is the purpose of a reverse mortgage?

According to Datuk Chung of Cagamas, “A reverse mortgage allows an elderly homeowner to take out a loan using their primary residence as collateral. In return, they receive a continuous payout every month while they are allowed to stay.” in the house. “

In other words, a reverse mortgage allows a homeowner to monetize the equity of their property. As the loan matures, the homeowner’s debt increases while his or her equity in the property decreases.

In the context of Malaysia, a reverse mortgage can help seniors who own real estate but do not have enough savings to spend their golden years by receiving payments from mortgage holders against the security of their real estate.

When will the amount received under a reverse mortgage be paid back?

The repayment of the loan, including interest, is usually only made after the death of the home owner, when the house is moved out or sold.

In the event of the mortgage debtor’s death, the next of kin can repay the loan and take back the property or sell the property to repay the loan and interest.

According to Datuk Chung, “If the house is sold for more than the amount owed, the homeowner or heirs will receive the balance. However, if the house is sold for less than the amount owed … the losses will be borne by the surety – in this case, Cagamas. ” It appears from this statement that the reverse mortgage form under consideration in Malaysia is guaranteed by Cagamas. By having the Cagamas Guarantee in place, the credit risks of the loan are effectively transferred from the lender to Cagamas.

Is a Reverse Mortgage a New Concept?

No. Reversible mortgages have been around for some time in other jurisdictions such as the United States of America, the United Kingdom, Australia, South Korea, Hong Kong, and Singapore.

In response to a question asked during Parliamentary Question Time on August 1, 2017, Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of the Singapore Monetary Authority, said that some financial institutions in Singapore had offered reverse mortgages but stopped doing so due to lack of demand.

Reverse mortgage drawdown options

To get an idea of ​​how reverse mortgages are drawn, we turn to the United States Fair Trade Commission1 website, which lists several options for drawing, namely:

  • one-time withdrawal option – the funds may only be used for specific purposes and are usually a fixed rate loan;
  • Term option – fixed monthly cash advances for a certain period of time;
  • Tenure option – fixed monthly cash advances as long as the mortgagee lives in the property;
  • Line of Credit – the mortgagee will draw on the loan at a time and in an amount that it deems appropriate within the granted line of credit; and
  • Combination of monthly payments and credit lines.

If the main goal of introducing reverse mortgages in Malaysia is to remove the income insecurity of seniors with inadequate retirement provision, then the single payout or credit line should only be allowed to be used for specific purposes such as home repairs or medical expenses to avoid unnecessary and reckless consumption by the mortgagee.

What will be the main legal barrier to reverse mortgage in Malaysia?

Under Malaysian law, a reverse mortgage is primarily formalized by a charge under the National Land Code (Revised 2020) or, in the case of an untitled property, by an assignment of the rights and interests under the purchase agreement in relation to the property in favor of the lender.

Most financial institutions in Malaysia are reluctant to allow another lender to take a second charge or otherwise participate in the security of property assigned to them for an existing loan. For example, the viability of a reverse mortgage on property that is subject to an existing security depends on whether or not the existing securityholder is willing or willing to provide the borrower with another reverse mortgage loan share held securities with the lender under a reverse mortgage, the latter being an unlikely scenario.

What are the factors to consider when taking out a reverse mortgage?

Some of the factors a homeowner should consider when taking out a reverse mortgage are:

  • Whether the non-borrowing spouse of the mortgage lender can remain in the home after the mortgage lender’s death if the property is the primary residence
  • Are the periodic payments or lump sums received from the mortgage lender tax-free?
  • What are the costs of obtaining a reverse mortgage?

Will reverse mortgage be popular in Malaysia?

From the point of view of financial institutions unfamiliar with reverse mortgages, such a transaction is new (especially in the case of a reverse mortgage with tenure option) as the loan repayment obligation arises when the borrower dies or leaves or sells the property. While a Cagamas guarantee will greatly reduce the credit risk of the transaction, it will be interesting to see if lenders are keen on this form of financing.

The practice of filial piety is deeply rooted among Malaysians regardless of their ethnicity. It is therefore not uncommon for the younger generation to regularly provide some form of financial support to their elders in old age. It is also common for individuals to strive to pass real estate on to their future generation in order to preserve family wealth. These factors, particularly the possibility that a reverse mortgage could jeopardize that legacy, especially if the next generation lacks the financial means to buy their own property or get the property under a reverse mortgage, could result in a muted response lead reverse mortgages.

Comments

The concept of reverse mortgages is interesting and well meant. Are they a godsend for insolvent seniors or a millstone around the neck of their successors?

footnote

1. https://www.consumer.ftc.gov/articles/0192-reverse-mortgages#how

Originally published June 24, 2021

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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