As Hong Kong’s population ages at a rapid pace, is reverse mortgage a fool-proof way to secure one’s future and kill post-retirement blues? Luo Weiteng looks at the issue.
Simon Yip, a 64-year-old taxi driver, was a happy man. On July 11, 2011, the Hong Kong government ended its longstanding opposition to reverse mortgage (RM) and decided to back Hong Kong Mortgage Corporation Limited (HKMC)’s pilot RM scheme. Yip thought the move would enable him to retire peacefully.
“Initially, I thought I could fund my retired life by working part-time as a security guard or cashier at convenience stores,” said Yip. “But then I realized I might not be able to work much longer as being a taxi driver had weakened my system considerably.”
He had been playing the stocks for almost 20 years, but managed only to hold on to the capital he had invested. His life’s savings went into the house he lived in. As the sole breadwinner of the family which would slide into a dire financial crisis once he retired, Yip has yet to decide whether to sign up for the RM scheme.
According to figures on HKMC’s website on June 30 this year, the total number of applications seeking reverse mortgages — by which elderly property owners get to convert a portion of their home equity into cash payments — was 640, almost 180 more than that last June.
“More and more people my age are retiring without accumulating much fortune, except a house. The RM scheme is something of a last resort for us,” said Yip. “At least, it helps one to retire without being a burden on our children.” “It will still take a while to have a well-organized public pension system in place in Hong Kong. The money from the existing Mandatory Provident Fund Scheme doesn’t add up to much. From this perspective, the RM scheme provides one more option, if not an ideal one, for Hong Kong’s retirees,” said Vincent Cheung, national director of Valuation and Advisory at Cushman & Wakefield, Greater China.
However, he felt the scheme may not be favored by “elderly people who want to leave wealth to their children”. “Especially given the skyrocketing property prices in Hong Kong, they might want to have their offspring inherit the property.”
HKMC’s Chief Executive Officer, Raymond Li, however, feels one’s aversion to the RM scheme is often the result of huge misunderstandings. The property was redeemable after the borrowers have passed away as long as their children paid back the loan.
Offspring to benefit
And the amount to be paid back remained unchanged despite possible appreciation of the value of a property. So it’s the borrowers’ offspring who stands to benefit rather than the HKMC, said Li.
Potential customers, feels Cheung, are taking their time to warm up to the scheme, as property prices in Hong Kong, whether that of old or new apartments, keep rising. “Hong Kong’s property market being highly liquid, it’s easy for property owners to make a profit. There are buyers even for properties that are several decades old. Especially, the government compensation for demolition of some of the old buildings can be far more than the payouts under the RM scheme,” he says.
Raymond Li, however, is quick to point out the risks involved. “First, it can be very dangerous for old people to receive a large sum of money. It will attract a bunch of greedy people, including, perhaps, their sons and daughters. Second, the elderly have to find investment channels to generate returns to fund their retirement.”
Given that elderly people were often averse to investing their money, this could pose a problem, he felt. Besides, they might have nowhere to stay in if they sold the only property they had. Renting an accommodation could be an additional expense. They would also have to take into account the possibility of exhausting the fund during their life time.
Li pointed out that the demand for the RM scheme will catch on, especially now that HKMC is offering incentives to the potential customer. In October, 2012, the maximum specified property value for payout calculation was increased from HK$8 million to HK$15 million while the minimum age of borrowers was lowered from 60 to 55 following requests from potential customers. The maximum lump-sum payout amount was raised from 50 percent of the actuarial value of the reverse mortgage to 90 percent, aiming to help those looking for a larger single payment to meet immediate needs.
Such provisions were made with a view to bringing greater flexibility and benefits to a wide and steadily-growing range of borrowers, added Li. “When reverse mortgage was introduced in 2011, it was largely intended for people who were cash-poor, yet property-rich,” he said. “But soon we found out that moneyed people were also interested in this scheme.”
The current highest monthly payout from the RM scheme is up to HK$100,500 ($12,964) and the highest appraised property value shoots to HK$45 million ($5.8 million). In both cases, the borrowers are very rich, said Li. In fact, the scheme is no longer just meant to bail out people with limited means wondering how to cope with retirement. A large number of rich people approaching retirement were seriously considering joining the scheme to ensure having a regular and stable income, he said.
Stable income guarantee
“In an uncertain and unpredictable world, the Lehman Brothers can crash overnight and more than 200 banks in the US fail every year. Rich people prefer not to put all eggs in one basket when they retire,” said Li. He feels it’s the guarantee of having a stable source of income that makes rich people opt for the RM scheme. “While there’s never a lack of investment products in Hong Kong, the chilling reality is that none of them comes with a zero risk as the RM does,” says Li, adding that the only party who was exposed to risk here was HKMC, who could make a loss if the value of a property declined, interest rates were raised and borrowers lived too long.
By 2050, the World Health Organization predicts, Hong Kong will have the fifth-largest population density of elderly people worldwide. To hedge the risks, the HKMC offered yet another incentive in October 2013, encouraging borrowers to sign their life insurance policies to the HKMC. This way, they get more in terms of monthly payouts by tapping the cash value of their life insurance policies without touching the death benefits.
“And it lends us an additional protection besides the property itself as the cash value of a life insurance policy does not fluctuate like property value,” said Li.
Reversed mortgage is a money-making financial product rather than a welfare policy. But it can work in tandem with improving the social security mechanism, said Dominic Wu, managing director and senior risk manager at BNY Mellon.
He predicts a stable market demand for the RM scheme since it helps a growing number of elderly people to unlock the concentration of wealth in the form of property.
“However, in order to care for an aging population, we need to call for a public pension policy,” says Wu.
“The RM scheme is a financial product catering for the specific financial need of some people. As a growing business, it will eventually be known to and accepted by more and more people. At the same time, it is a complicated product which takes time to understand,” said Li.
“The problem is that many Hong Kong people aren’t bothered to find out about it,” he added.