By Jessica Wee
One of life’s greatest joys is to have the certainty of coming home to a debt-free property. However, some retirees find themselves in the doldrums when money management becomes an issue.
As humans are living longer than ever before, those who are caught unprepared realize there isn’t enough retirement savings to last them those extra years and most of their net worth is tied up in their house. Enter the reverse mortgage!
Reverse mortgage, in short, allows retirees to turn an otherwise illiquid asset into cash that can be used to cover expenses in retirement while continuing to live comfortably in the same house.
Repayment of the loan is only made when the person dies. When the time comes, proceeds from the property sale will be used to pay off the debt.
If there is balance from the sale, it will go into the estate. If the loan amount is more than the property value, the estate/beneficiaries are protected and do not need to pay the difference.
If your beneficiaries decide to keep the property, they can choose to repay the reverse mortgage.
Let’s consider the advantages of reverse mortgage in a nutshell:
- Access to extra cash for medical bills and daily living expenses
- Your estate/beneficiaries are protected and do not owe money to the bank if the loan taken is more than the property value
- You can choose to receive the cash in lump sum or monthly payment
- Continue to stay in the house
- Easy to qualify, the general accepted age is above 55 years old
- No tax liability as the money from a reverse mortgage is a loan, rather than an income
- You get to keep the title in your home the entire time and balance of the loan will not be due until you die.
However, one must take into consideration the not-so-rosy part of a reverse mortgage:
- High interest rate of 5% and above per annum. The interest and fees associated with the loan gets rolled into the balance each month. That means the amount owing will grow over time, while your home equity decreases
- If you decide to move out, you need to repay the loan
- You may lose the ownership of your property if you decide to move out without repaying the loan
- Fees incurred – You must keep the home insured and maintained
- Your beneficiaries could inherit less
If you are considering this type of loan, make sure to weigh all the pros and cons. All things considered, reverse mortgage is a lifeline for some retirees.
Here are some factors that can make taking a reverse mortgage worth it:
- You home is increasing in value considerably
- You can take a reverse mortgage to fund your lifestyle and still have money left over for your beneficiaries
- You plan to stay in your home for a long time – this will make the costs justifiable
- You have the financial ability to cover the costs of maintaining your home annually ie maintenance, tax, insurance, etc
Malaysia’s national mortgage corporation (Cagamas) is allocating RM100mil for its first reverse mortgage scheme (Skim Saraan Bercagar), announced in late 2021 for retirees with properties in Kuala Lumpur.
To further ease their burden, there is a 2 year stamp duty exemption until December 2023 on transaction documents for the parties involved.
Make an appointment for enquiries about Skim Saraan Bercagar at any EPF branches.