RISK OF REVERSE MORTGAGE LOANS IN SINGAPORE FROM A BORROWER'S PERSPECTIVE

Abstract

This study seeks to account for the unpopularity of reverse mortgage products in Singapore by analyzing their risks from the perspective of borrowers. Reverse mortgages were first introduced overseas and were finally allowed for both private properties and public housing in Singapore in 2006 after years of lobbying. However, the demand for reverse mortgages turned out to be dismal and the scheme was subsequently phased out in 2008. This study uses a benchmark scenario to illustrate the various loan to value ratios throughout a reverse mortgage loan tenure under OCBC‟s term based option and annuity-linked option. Through modelling reverse mortgages, sensitivity analysis was carried out by varying the interest rates, property appreciation rates and expected life spans of the borrower. Comparisons were subsequently made between the loan to value ratios of an annuity-linked reverse mortgage scheme and the Lease Buyback scheme by the Housing and Development Board. The findings demonstrate that borrowers were at high risk of exceeding the maximum loan to value ratio imposed by OCBC‟s annuity-linked option under unfavourable market conditions. This implies that they faced the probability of having reduced or no payouts, or might even end up having to repay the loan should the accumulated loan balance exceed the future value of their properties. The annuity-linked option was also found to exhibit the greatest difference in loan to value ratios compared to the Lease Buyback scheme when market conditions were unfavourable. This difference was observed to be negligible when the market was doing well. It is suggested that by incorporating features of the reverse mortgage system present in the United States, the risk faced by borrowers could be lowered significantly. Reverse mortgages could then appear more attractive to retirees in Singapore as an option for them to unlock their housing equity.