DBS's reverse mortgage offer is a stab at unlocking the 'asset-rich, cash-poor' conundrum

With rising life expectancy and not knowing how long one may live, getting a higher monthly payout for life looks appealing, but there are interest costs to bear

Sep 09, 2021

THE population is getting older. People are living longer. Some have insufficient retirement savings. Private home prices are rising. People are searching for more recurring income.

Against this backdrop, DBS introduced a reverse mortgage offering - the Home Equity Income Loan - in August. The bank uniquely tied up with the Central Provident Fund (CPF) to help seniors unlock equity from their private homes while they continue to live in them.

Singaporeans and permanent residents aged 65 to 79, who own and reside in fully paid private properties, can take a loan to top up their CPF retirement sums. The borrowed amount is used to raise the monthly payouts these customers receive for life under the CPF Life Scheme.

Maximum loan period is up to 30 years. Loan quantum is capped at an individual's CPF Enhanced Retirement Sum (ERS) - S$279,000 for 2021 and S$288,000 for 2022.

A leasehold property used to secure the loan must have at least 30 years left on the lease when the loan matures. The interest rate is currently fixed at 2.88 per cent per annum throughout the loan period.

No monthly loan repayment is required. A lump sum repayment of principal and accrued interest is due at maturity.

The bank's pitch to customers is that one can get monthly payouts for as long as one lives while continuing to own and enjoy living in one's own home.

Typically, Singaporeans today do not receive pensions when they retire. A Retirement Account is set up in the CPF when one turns 55. This account is funded by savings from one's CPF accounts and possibly cash top ups. Savings in the Retirement Account are used to fund the receipt of monthly payouts from age 65 onwards under the CPF Life Scheme.

For those who turn 55 this year, the Basis Retirement Sum (BRS), Full Retirement Sum (FRS) and ERS are S$93,000, S$186,000 and S$279,000 respectively.

One can then receive a monthly payout for life of S$770-S$830, S$1,430-S$1,530, or S$2,080- S$2,230 from age 65 onwards, based on setting aside the BRS, FRS or ERS respectively.

According to CPF data, among those who turned 55 in 2020, about 64 per cent managed to set aside their FRS, or at least their BRS while owning at least one property.

The DBS scheme allows for topping up to at least the FRS and up to the ERS.

Among Singapore residents, life expectancy at age 65 was 19.6 years for males and 23.2 years for females in 2020 - up from 18 years and 21.4 years for males and females respectively in 2010.

With rising life expectancy and not knowing how long one may live, getting a higher monthly payout for life looks appealing.

The DBS scheme helps one to get more recurring income but there are interest costs to bear.

An annual interest rate of 2.88 per cent appears high compared with interest charges on loans used to finance home purchases - loan packages with fixed rates for the first two or three years typically charge interest rates of less than 1.5 per cent per annum. It is worthwhile watching if other banks would offer lower interest rates on a similar product.

Still, the rate of 2.88 per cent is fixed today for a period of up to 30 years, which may be reasonable for those who are fearful of interest rates rising substantially in the future. Customers can also sell their property any time and repay the loan without a penalty fee.

For perspective, there are more cost-effective ways to boost recurring income. An owner of a fully paid private home can sell the said home and use the proceeds to buy a lower priced replacement home, while freeing up funds that can be used to earn recurring income for example by investing in real estate investment trusts (Reits). Distributions from Reits may be subject to some volatility but can grow over time.

Alternatively, renting out a room in one's home helps generate an income stream without incurring borrowing costs.

Still, the appeal of the DBS scheme probably lies with seniors who want to continue to own and enjoy their homes without having to share the space with a tenant. It also makes sense for seniors who are not interested in leaving large estates to their beneficiaries.

Bequeathing an unencumbered private home to the next generation may become less of a desire for seniors amid the rise in the number of singles and couples without children.

Even for seniors with children and grandchildren, they might be more focused on funding their own needs rather than on being a burden to the next generation or leaving large bequests.

Taking a reverse mortgage on one's home is a big decision.

Under the DBS scheme, if one needs to raise more funds later on, one can still sell the home but net proceeds received would be much lower post-loan repayment.

By using the DBS scheme, a senior is realising some value from his home today, but is thereby limiting future financial flexibility. A senior would thus be advised to use the higher cash payouts from CPF Life Scheme prudently. Still, with the DBS scheme, one does not forego the future capital appreciation of one's home.

Seniors looking at this scheme will need to ask if the higher monthly payout from taking up the DBS scheme is adequate, or if there is a need for a course of action that generates even more in recurring income. They would also likely need to get a sense of the views of those who are meant to inherit the property.

For financial institutions, addressing the needs of the asset-rich and cash-poor segment of the population could increasingly yield fruitful results. Expect more innovations on this front, which should benefit seniors as they get more options.

The demographic shift in ageing Singapore will spark economic trade-off questions in due time.

These include questions around Singapore becoming an increasingly high-cost society and whether there is a need to tackle the wealth gap, which is often linked to how much older properties have gained in value over the decades.

The latest reverse-mortgage offering is a step by Singapore institutions in acknowledging that cash-poor seniors can independently seek out ways to unlock value from their existing assets to fund their longer lifespan.

A property is a hard asset, but it is also a home. It provides shelter, holds years of comfort and memories - and yes, offers a financial return too. When and how a senior wants to unleash the financial return potential of one's precious home needs careful consideration. Having more options on the table is a start.