Backwards mortgage offers pension from home equity
The Hong Kong Mortgage Corporation launched its reverse-mortgage scheme with seven banks yesterday, targeting people aged 60 and above.
Reverse mortgages can allow the elderly to use their homes as collateral in return for a fixed sum every month for the rest of their lives. The payout can also be handed over in one lump sum.
The mortgage-holders remain in their homes until they die, at which point the property is sold - unless the heirs agree to pay back the money received by the deceased plus interest.
If the proceeds from the sale exceed this amount, the surplus goes to the heirs. If the proceeds fall short, the HKMC makes up the difference to the bank.
Reverse mortgages, however, are no free lunch, and are considered complex and expensive. Not all applicants will qualify for a lifetime mortgage. In general, the older the borrower, the shorter the loan term and higher the monthly payout. Once the fixed-term loan comes to an end, the mortgage holders must repay the sum plus interest, which may mean selling the property.
'For the mortgage owners, the cost is substantial as they have to pay an insurance premium and compound interest,' said Billy Ma, chairman of the reverse mortgage committee of the Law Society of Hong Kong.
The real question is, 'are the borrowers really willing to give up their property when they pass away', said Sharmaine Lau, chief economist at Referral Mortgage Brokerage Services.
She said the reverse mortgages would appeal most to people without heirs.
Norman Chan, the deputy chairman of the HKMC and chief executive of the Hong Kong Monetary Authority, said reverse mortgages were being introduced because of concerns about Hong Kong's fast-ageing population.
In 30 years, the ratio of people aged 65 to those aged between 15 and 64 will drop from 1:5.6 to 1:2, according to the Census and Statistics Department.
The HKMC has asked the Law Society to arrange for lawyers to act as independent third parties to explain the details, rights and obligations to borrowers.
Banks will only be able to process reverse mortgages once applicants have undergone this legal counselling.
The interest rate to be charged by banks on the loans will be the HKMC's prime lending rate minus 2.5 per cent per annum.
The seven banks offering the HKMC reverse mortgage are: Wing Lung Bank, Bank of China (Hong Kong), Nanyang Commercial Bank, Bank of East Asia, Bank of Communications Hong Kong Branch, Standard Chartered Bank and Wing Hang Bank.