Reverse mortgages provide cash security for retirees: scheme enables home equity to be converted into monthly payouts

Raymond Li Ling-cheung is a senior executive director and CEO of the Hong Kong Mortgage Corporation (HKMC). He talks about reverse mortgages.

What is a reverse mortgage and how does it work? What types of properties are covered?

The Reverse Mortgage Programme (RMP) provides an option for seniors and retirees to convert home equity into a stream of steady cash while staying in their home during their lifetime. The home is used as collateral to get a reverse mortgage (RM) from a participating bank. He or she will receive monthly payouts, either over a fixed period or throughout his or her life. In general, the applicant does not need to repay the RM during his or her lifetime. Private residential property owners aged 55 or above and owners of government subsidised flats, who are aged 60 or above, are eligible to apply for the RMP.

Under what circumstances should one consider a reverse mortgage?

RMP is a useful tool for retirement as it provides a stream of steady cash while allowing the participants to reside in their own homes during their lifetime. It can also be used for risk management as the determined amount of monthly payout will be fixed and unaffected by the future movement of property values, interest rates and changes in the economy.

What is the difference between a reverse mortgage and a regular home equity loan?

Unlike a home equity loan, which requires the borrowers to make monthly payments over a set amount of time, RMP participants do not need to repay the bank during their lifetime. As the applicants of the RMP have no financial responsibility to make monthly payments, the banks are not concerned about their credit history and repayment capability, which are considered important factors when applying for a home equity loan. The RMP is insured under an insurance arrangement between the bank and the HKMC. When the loan matures any surplus arising from sale of the mortgaged property would be passed to the borrower’s heirs. However, any shortfall

would be borne by the HKMC as the insurer, and would not be passed on to the heirs of the borrower’s estate.

How much does a reverse mortgage cost?

The major costs are interest expenses and mortgage insurance premiums. The interest rate charged on the outstanding loan amount in reverse mortgages will be the Hong Kong prime rate (5.25 per cent) minus 2.5 per cent per annum. The total upfront premium is 1.96 per cent of the specified property value and the monthly premium is 1.25 per cent of the outstanding loan amount.

Can I sell my property if it is on a reverse mortgage?

An RMP participant can sell his or her property at any time. Like any mortgage loans, the outstanding loan amount under a RM must be settled in full

on sale.

Will the heirs get the property after the

owner dies?

The heirs have the preferential right to redeem the property by repaying to the bank in full the outstanding loan amount under the RM. If the inheritors choose not to exercise such a right, the bank will sell the property to recover the outstanding loan amount. If the sale proceeds from the property exceed the outstanding loan amount, the bank will return the surplus to the heirs.

How do I know if my property is eligible for a reverse mortgage?

It must be a residential property in Hong Kong and held in the borrower’s own name, or in joint names of up to three borrowers as joint tenants. The property must not be subject to any resale restrictions, except for the alienation restrictions of subsidised-sale flats.

How does it work with a life insurance policy?

The RMP participant may assign his or her life insurance policy to the bank as extra collateral in addition to his or her residential property under a RM. This could increase the amount of payouts on the RM loan.