Is the new DBS reverse mortgage loan good for the asset-rich, cash-poor retirees?

DBS and CPF have tied up, to create the new DBS Home Equity Income Loan.

This helps older Singaporeans to monetise their property assets, without having to sell.

The concept behind this loan isn’t new (banks have tried selling reverse mortgages before, but they were never popular).

This is, however, the first time we’ve seen it tied in with CPF.

If you’re not familiar with the concept of a reverse mortgage, here’s how it all works:

What is a reverse mortgage?

With a regular mortgage, the bank lends you the money for the property first, and you pay it back every month until the loan tenure ends.

With a reverse mortgage, it’s the other way around. The bank pays you every month, until the end of the loan tenure.

At the end of the loan, you then need to pay back the full amount you’ve received, with interest; this is usually done by selling the house to repay the loan.

It’s easy to confuse reverse mortgage with cash-out refinancing because of similar product names

A reverse mortgage is not the same as cash-out refinancing, a product that also happens to be called a “home equity loan” by many banks.

A cash-out refi is when you take out a loan, using your property as collateral.

Unlike a reverse mortgage, a cash-out refi means you get the borrowed money in one lump sum. Also, you must make monthly repayments as per usual.

So despite similar-sounding names, the two serve different purposes.

How does the tie-up with CPF work?

The loan will be available to Singaporeans and Permanent Residents only, who are between the ages of 65 to 79.

This loan is for owners of a single paid-up private property only (flat owners already have other options, like the Lease Buyback Scheme).

You must also be residing in the property, and it must be fully paid up.

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And if your property is leasehold, there must be at least 30 years left on the lease.

The maximum loan amount is the difference between your current CPF savings, and the CPF Enhanced Retirement Sum (you can check the CPF site to see what the current sum is).

For example, if you have $150,000 in your CPF, and the current Enhanced Retirement Sum is $297,000, then the maximum loan amount is $147,000.

Once the loan is approved, the bank will send the money to your CPF account.

You will then receive accordingly higher CPF payouts, from your now topped-up Retirement Account (RA).

You don’t need to repay this loan until the end of the loan tenure

The maximum loan tenure is 30 years, or until the youngest borrower reaches the age of 95.

The interest rate on the loan is fixed at 2.88 per cent.

At the end of the loan tenure, you will have to pay back the entire amount borrowed, with interest.

It’s expected that you’ll do this by selling your private property.

However, we’ve been told that – if you can manage to repay the loan by other means, you’re also free to do so.

What’s the difference between this reverse mortgage and others on the market?

Besides the tie-up with CPF, some notable traits are:

• Fixed interest rate throughout the entire loan
• Flexibility to sell before the end of the loan tenure
• No immediate action upon death, bankruptcy, or outliving the loan
• Promise of no margin calls

1. Fixed interest rate throughout the entire loan

Earlier reverse mortgages were unpopular because they lacked this key feature.

In the past, interest rates were always variable, so you didn’t know how much you had to pay back at the end of the loan tenure.

One common fear was that, if rates spiked, you would be unable to cover the amount owed even after selling the property.

2. Flexibility to sell before the end of the loan tenure

We do not yet know if refinancing is allowed when you take this loan.

However, DBS has said there’s no penalty if, before the loan ends, you decide to sell your private property and pay off the outstanding debt.

We have seen partial waivers for prepayment penalties, in earlier reverse mortgage products; but we don’t think we’ve seen one that promises zero penalties before.

3. No immediate action upon death, bankruptcy, or outliving the loan

In our experience, banks don’t like to immediately foreclose anyway (they will lose money too!). 

But it’s good to have it as a stated promise.

This doesn’t mean the loan will be written off in such situations; just that the bank will try to come to a different arrangement, other than foreclosing right away.

4. Promise of no margin calls

This means that, if your property falls in value, the bank will not ask you to make immediate cash repayments to make up for it.

This is nice, but we rarely see margin calls in Singapore anyway (your property value needs to plummet by an abnormally steep amount before this happens).

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Is this loan worth taking?

The upsides of taking this loan are:

• Monetising the property without renting or selling
• Long loan period, given the age demographic
• Easing the stress off our children
• Safer and more prudent than a lump sum cash-out

1. Monetising the property without renting or selling

This is the number one benefit of a reverse mortgage.

It’s not uncommon for older Singaporeans to have a fully paid-up property worth over a million, and yet have insufficient income to really enjoy retirement.

These seniors are often uncomfortable renting out to strangers, and moving is a hassle at their age (besides, all their friends and hang-out spots are probably nearby).

A reverse mortgage allows them to increase their income, while still residing in the same property.

2. Long loan period, given the age demographic

If you are 65 years old, there are no other loan options that will still give you a 30-year loan tenure.

Likewise, there are few financing options for people in their 70s or 80s.

3. Easing the stress off our children

The higher your monthly CPF payouts, the less your children need to contribute to support you.

There aren’t even monthly loan repayments that you need to make, unlike a cash-out refi, or other loan options.

4. Safer and more prudent than a lump sum cash-out

The lump sum from a cash-out refi can be dangerous.

Consider the consequences of an online scam, or heavy gambling habits, if a borrower had 80 per cent of their property value in cash.

Getting higher monthly pay-outs is just safer and enforces a greater degree of prudence.

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What are the downsides of taking this loan?

• Less for your estate when you pass on
• No lump sum restricts the possible loan uses
• The interest rate is a little high

1. Less for your estate when you pass on

Unless you have some other way to repay the loan, chances are your property will have to be sold.

Keep in mind that the interest rate (see below) on a reverse mortgage is higher than a typical property loan, which is 1.3 per cent right now.

When the house is sold, a larger portion of the returns will go toward paying off that higher interest rate.

This can lower the amount you leave to your beneficiaries, so do work it out with your chosen estate planner.

2. No lump sum restricts the possible loan uses

If you want to use the property to fund your children or grandchildren’s overseas education, or to start their business, then the reverse mortgage doesn’t help (all it does is increase your monthly payout).

Likewise, investment-savvy homeowners may want to monetise their property, to pick other investment assets (stocks, bonds, gold, etc.) for their long-term retirement.

For these other purposes, you’ll need a cash-out refi, which is far more versatile.

3. The interest rate is a little high

We think 2.88 per cent is on the high side, given that a cash-out refi has a rate of around 1.3 to 1.6 per cent.

But this may not matter, depending on your intentions (if your children are already doing well, and you’ll be 95 when the loan tenure ends, you probably won’t care how much lower the returns are).

Overall, this loan is a good solution to the increasing number of “asset rich, cash poor” Singaporeans

This will become increasingly important, given Singapore’s ageing society; and it provides another safety valve for condo buyers.

At the very least, the increased payouts can help to ensure the condo maintenance gets paid.

This article was first published in StackedHomes.