Recently, there has been much hype about this new retirement option. DBS has recently launched its new Home Equity Income Loan to help seniors use their fully paid private homes to boost their retirement income*.

Firstly, let’s look at what’s a reverse mortgage. A mortgage is typically the single-largest debt that any household would need to take on, to ensure a roof over one’s head. The mortgage amount is a ratio to the property value, known as the loan-to-value ratio (LTV). In a reverse mortgage, seniors who have already paid up their mortgages on their properties can seek out a bank to have it lend money to them, with them borrowing against the home value against much lower LTV limits compared with a conventional mortgage. This form of financing allows borrowers to unlock some immediate cash out of their property, but comes naturally with interest that needs to be paid, commonly by selling the house later**.

So, what’s the spin for this reverse mortgage? Singaporeans and permanent residents aged 65 to 79 who own and reside in fully paid private properties can take out such a loan to top up their CPF retirement sums. The borrowed amount is then used to raise the monthly pay-outs these customers receive for life under CPF Life. This is done by topping up a lump sum into these individuals’ CPF retirement accounts. These customers will hence apply to the CPF Board to increase their monthly CPF Life pay-outs**.

What are some of the main benefits?

1. You can enjoy the property and yet still have sufficient retirement funds.
2. Fixed interest rates throughout the loan tenor, resulting in more stability during your retirement years.
3. Loan tenor can be up to 30 years or until the youngest borrower reaches age 95.
4. No margin calls in the event that the value of the property falls.
5. No monthly repayments required. Only a lump sum payment when the loan expires.

What about the risks?

1. If one of the borrowers pass on, the surviving spouse would need to repay the loan back in full.
2. The health of seniors may deteriorate over time and may require the care of specialised facilities, thus not being able to continue the loan.
3. Interest rates are relatively high with reduced pay-out flexibility. Interest rates in this case is at 2.88% while a standard mortgage is at 1.10%. Furthermore, there’s time value of money lost with the funds being provided to the seniors on a monthly basis.

* How the new DBS reverse mortgage loan works, Property News & Top Stories - The Straits Times, https://www.straitstimes.com/business/property/how-the-new-dbs-reverse-mortgage-loan-works, 16 Aug 2021

** BT Explains: Reverse mortgage with a CPF twist, Banking & Finance - THE BUSINESS TIMES, https://www.businesstimes.com.sg/banking-finance/bt-explains-reverse-mortgage-with-a-cpf-twist, 26 Aug 2021