The Reverse Mortgage – A Godsend or a Millstone?

It is reported in the article, “Weighing the need for a reverse mortgage”, published in StarBiz on 15 May 2021, that many retirees in Malaysia seem ill-prepared for retirement and that 54% of Employees Provident Fund contributors aged 54 have less than RM50,000 set aside for retirement.
 
The article further highlighted that 70% of the contributors who withdraw their EPF contributions at 55 use up their savings within a decade of their 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 is looking to launch its reverse mortgage scheme later this year to address income insecurity for the elderly.
 
In this article, we will provide insights into certain aspects of a reverse mortgage.
 
What is a reverse mortgage?
 
Similar to a conventional home mortgage, a reverse mortgage is a loan that is secured against immoveable property. However, unlike a conventional mortgage, a reverse mortgage does not require the homeowner to make any loan repayments during the tenure of the mortgage. Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently or sells the home.
 
Under a reverse mortgage, the mortgagor will either receive monthly or other periodic payments during the tenure of the mortgage or a lump-sum payment for specific purposes, such as undertaking 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 his or her primary residence as a collateral. In return, they receive a steady stream of disbursement on a monthly basis while still being allowed to stay in the home.”
 
In other words, a reverse mortgage enables a homeowner to monetise the equity in his or her property. As the loan tenure progresses, the homeowner’s debt will increase whilst his or her equity in the property will decrease.
 
In the context of Malaysia, a reverse mortgage may help senior citizens who have immoveable properties but insufficient savings to get by their golden years by receiving payments from mortgagees against the security of their properties.
 
When does the amount received under a reverse mortgage become repayable?
 
The repayment of the loan, inclusive of interest, generally only occurs after the death of the homeowner, or when they move out or sell the house.
 
In the case of the demise of the mortgagor, the next of kin may opt to 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 sells for more than the amount owed, the homeowner or heirs will receive the balance. But if the house sells for less than the amount owed the losses will be borne by the guarantor – in this case, Cagamas.” It would appear from this statement that the form of reverse mortgage contemplated in Malaysia will be guaranteed by Cagamas. The existence of the Cagamas guarantee will effectively transfer the credit risks in the loan from the lender to Cagamas.
 
Is a reverse mortgage a novel concept?
 
No. Reverse mortgages have been in existence 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 posed during Parliamentary Question Time on 1 August 2017, Tharman Shanmugaratnam, the Deputy Prime Minister and Minister in charge of the Monetary Authority of Singapore, said that some financial institutions in Singapore had offered reverse mortgages but had ceased to do so due to a lack of demand.
 
Drawdown options for reverse mortgages
 
For an idea on how reverse mortgages are drawndown, we turn to the United States Fair Trade Commission’s website1 which sets out several drawdown options, namely:
 
  • single disbursement option – the funds may only be used for specified purposes and is usually a fixed rate loan;
  • term option – fixed monthly cash advances for a specific time;
  • tenure option – fixed monthly cash advances for as long as the mortgagor resides in the property;
  • line of credit – the mortgagor draws down on the loan at such time and in such amounts as he deems fit within the limit of the line of credit granted; and
  • combination of monthly payments and line of credit.
If the primary objective of introducing reverse mortgages in Malaysia is to address income insecurity of senior citizens with inadequate retirement savings, the use of the single disbursement or line of credit options should be permitted only for specified purposes like home repairs or medical expenses, to avoid unnecessary and reckless consumption by the mortgagor.
 
What will be the main legal impediment to a reverse mortgage in Malaysia?
 
Under Malaysian law, a reverse mortgage will be formalised primarily by a charge under the National Land Code (Revised 2020) or, for a property without individual title, an assignment of the rights and interests under the sale and purchase agreement relating to the property in favour of the lender.
 
Most financial institutions in Malaysia are reluctant to allow another lender to take a second charge or otherwise share in the security of the property assigned to them for an existing loan. Thus, in respect of a property which is subject to an existing security, the feasibility of a reverse mortgage will depend on whether the existing security holder will be prepared to grant a further loan to the borrower by way of a reverse mortgage, or whether, it will be willing to share in the security held by it with the lender under a reverse mortgage, the latter of which is an unlikely scenario.
 
What are the factors to consider when taking a reverse mortgage?
 
Some of the factors that a property owner should consider when taking a reverse mortgage are:
 
  • Whether the non-borrowing spouse of the mortgagor can remain in the home after the demise of the mortgagor if the property is the main residence
  • Are the periodic payments or lump sum received by the mortgagor tax-free?
  • What are the costs involved in obtaining a reverse mortgage?
Will reverse mortgages be popular in Malaysia?
 
From the perspective of financial institutions that have no experience in reverse mortgages, such a transaction will be novel (especially in the case of a tenure option reverse mortgage), as the loan repayment obligation will arise when the borrower dies or leaves or sells the property. While a Cagamas guarantee will substantially mitigate the credit risk of the transaction, it will be interesting to see whether lenders will have the appetite for this form of financing.
 
The practice of filial piety is deeply entrenched in Malaysians, regardless of ethnicity. Consequently, it is not unusual for the younger generation to provide some form of regular financial support for their elders in their old age. It is also common for individuals to strive to pass down immovable properties to their future generation as a way to preserve the family wealth. These factors, in particular the possibility that a reverse mortgage may jeopardise this inheritance especially if the succeeding generation does not have the financial means to acquire their own property or to redeem the property under a reverse mortgage, could result in a lukewarm response to reverse mortgages.
 
Comments
 
The concept of reverse mortgages is interesting and well-intended. Will they be a godsend to cash-strapped senior citizens or a millstone around the necks of their successors?
 
Article by Oon Hooi Lin (Partner) and Catherine Looi (Associate) of the Real Estate Practice of Skrine.