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Understand What Is Reverse Mortgage and How Does It Work?

Many of us who own our homes are asset rich and cash poor. Which may not be a bad thing if you are retired or near retiring age.

You can actually use our property to enhance your retirement lifestyle.

According to the CPF website, for the CPF life payout scheme 2021, if you have met the CPF basic retirement sum of $93,000, you will receive monthly payouts of between $770 to $830 for the basic plan. If you have met the full retirement sum of $186,000, you will receive monthly payouts of $1,430 to $1,530.

Hardly enough to sustain the lifestyle you enjoy before retirement.

However, if you have a fully paid-up property, you can leverage that to enhance your retirement fund, by taking either down-sizing, right-sizing or taking a reverse mortgage.

What is a reverse mortgage?

A reverse mortgage is using your property as collateral to take a loan. A reverse mortgage allows a homeowner to pledge your property for a sum of money at a very low-interest rate, typically about 1% to 1.6% per annum.

Commonly known as cash-out refinance or cash-out refi, it is only available for fully paid-up private property owners and you can borrow up to 80% of the value of the property.

This is way better than the normal loans available from banks and lenders.

Personal loans will incur interest rates of between 4% to 7% and renovation loans between 3% to 6%.

Unlike other forms of loans, a reverse mortgage will not be affected by restrictions faced by other forms of housing loans such as TDSR.

This is one way many retirees can unlock their housing equity and enjoy higher retirement funds without having to sell the property or downsize to a smaller unit.

So, if you own a fully paid $1 million property, you can take up a reverse mortgage loan of up to $800,000 for your retirement.

This would allow you to still live in your current home, without the hassle of moving to another house. At an advanced age, seniors should be taking it easy and live life to the fullest, instead of worrying about expenses. Taking a reverse mortgage would also allow seniors to depend less on their children for expenses.

Potential pitfalls

While it is good to capitalise on your housing equity, there is always a downside.

For whatever reason, if you are unable to repay the reverse mortgage, the bank/lender will repossess your property and sell it off to recoup the money.

This is even riskier if there is a market downturn and the value of the property drops. You may end up losing your home and still owe money to the bank.

You should also be careful about overextending your finances.

If there are other instalments that you are paying, taking a reverse mortgage will certainly add to it and you should always exercise caution when it comes to loans.

Is it applicable to HDB flats?

What about HDB flat owners? You cannot take a reverse mortgage using your HDB flat.

If you want to monetise your HDB flat, you can use the HDB’s Lease Buyback Scheme (LBS). Similar to reverse mortgages, you can boost your retirement fund and still continue to live in the flat.

This is done by selling part of the lease of the flat back to HDB. Take note that the minimum lease to sell back to the HDB is 20 years. The money from the sale of the lease will then be used to increase your CPF LIFE monthly payouts.

In summary, taking a reverse mortgage might be a quick and cheap way of obtaining cash but it certainly depends on what you are using it for.

Do be mindful of the pitfalls if you are not able to repay the mortgage.

For more property news, resources and useful content like this article, check out blog here.

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