Retire in comfort: reverse mortgages and the life annuity scheme give seniors steady income
Expert Raymond Li addresses concerns about programmes and schemes designed to give seniors and retirees regular cash payouts
Raymond Li is executive director and CEO of Hong Kong Mortgage Corporation (HKMC). He talks about the concerns of homeowners who have a reverse mortgage, or retirees who have invested
in the life annuity scheme.
What has been the response to the Reverse Mortgage Programme? What are its benefits, and what are the main concerns for homeowners?
The HKMC introduced the Reverse Mortgage Programme (RMP) in 2011 to enable senior citizens and retirees to receive a steady flow of cash while staying in their own homes for the rest of their lives. The RMP has seen an increase in popularity among senior citizens. As of March 31, the RMP had received a total of 1,728 applications. Some people have expressed concern about how the loan is to be repaid after the property owner has passed away. In fact, the heirs have the right to redeem the property by repaying to the bank in full the outstanding loan amount received by the deceased property owner under a reverse mortgage. If the heirs choose not to exercise this right, the bank will sell the property to recover the outstanding loan amount. If the sale proceeds exceed the outstanding loan amount, the bank will return the surplus to the heirs. If there is any shortfall, it will be covered by the HKMC through an insurance arrangement between the bank and the HKMC.
How does the life annuity scheme work? Are the monthly payouts fixed and guaranteed over the lifetime of the annuitants? What are its advantages compared with other investment products?
The HKMC aims to provide the life annuity scheme in the form of an immediate, lifetime-guaranteed fixed-payout annuity. It helps the elderly turn lump sums of cash into lifelong streams of fixed monthly income, so that they can enjoy the rest of their lives with fewer financial worries. The main terms of the scheme are still subject to further validation and confirmation. For now, the minimum premium is set at HK$50,000, while the maximum premium is set at HK$1 million, to be applied to each annuitant on a cumulative basis. The scheme begins making fixed monthly payments to the owner immediately until the death of the annuitant. Monthly fixed payouts for male annuitants, on the basis of the
HK$100,000 premium, are estimated at about
HK$500 and HK$580, respectively, assuming internal rates of return at 3 per cent and 4 per cent, respectively. Monthly fixed payouts for female annuitants on the same premium basis and assumptions are estimated at HK$450 and HK$530, respectively. The main advantages, compared with other investment products, are the stability and lifelong nature of the income stream. All investment risks are assumed by the HKMC. The monthly payouts are guaranteed.
HKMC promotes mortgage-backed securities. Can you explain briefly how this works?
Banks may sell mortgage loan portfolios to the HKMC as and when they have liquidity needs. To facilitate the issuance of mortgage-backed securities (MBS), the HKMC may from time to time consider selling mortgage loan portfolios to Bauhinia MBS, a special purpose company established for issuing MBS. Through standardisation of product structure and documentation, the MBS programme provides a platform for both the HKMC and banks to conveniently convert their illiquid mortgage portfolios into liquid and marketable MBS, thereby managing the liquidity, credit, interest rate and asset liability maturity mismatch risks as well as other balance sheet management objectives.
Are individual investors able to participate in the Bauhinia Mortgage-Backed Securitisation Programme or invest in securities or debts issued by the programme?
The US$3 billion Bauhinia Mortgage-Backed Securitisation Programme is a convenient, flexible and cost-efficient platform for the HKMC to issue MBS with various product structures, credit enhancements and distribution methods. Generally, MBS targets institutional investors, but the HKMC issued its first ever retail MBS to the general public in November 2004.