Reverse Mortgage: financial innovation for the elders

By: Nipaphan Poonsatiansup CFP® Freelance financial planner, writer and lecturer.


At present Thailand is at the transforming era from an aging society to the aged society, comprising of over 20% population in 2021 at the age of 60 years and older.  More than 10 million Thai people, approximately 15% of the population, are 60 years old and over with a trend to live longer which more or less affect savings for the post-retirement living support. 
 

Accordingly, the government starts launching new policies to support the olds which include Reverse Mortgage (housing mortgage for the olds), a new alternative financial product for elder people.  The term Reverse Mortgage refers to the alternative home buying to replace the regular way of financial support from a bank loan in lump sum, then paying back monthly for the agreed upon period, whereas the reverse mortgage is to pre-sell the bought home to the bank and receive monthly payment from the bank until the buyer (home owner) passing away.  Then the bank becomes the home owner for reselling to certain inherited persons or to auction. Therefore, the home owner is entitled to live in the house, as if being the real owner, until the last living day. 

Reverse Mortgage was firstly introduced in USA during 1988 as viewed by the state that since there were many old owners this would be an alternative to enable retirees to live on their own money until their last days.  Then the eligible descendent shall be firstly allowed to redeem the asset prior to auction by which the price margin shall be inherited by the identified heir.  In the case of a lower selling price the financial institute shall not be of over burden since there is an insurance policy to take care of any possible margin between indebted and housing value. 


The Reverse Mortgage policy is suitable for a smaller family, depending on self-support, which has no need to give assets to inherited children.  Followings are conditions of Reverse Mortgage. 
 

  1. The borrower’s age shall be fixed for the starting year, normally at 60 years old as it is to support old people.  For instance, it is 62 years old in USA, 60 years old in South Korea and 55 years old in Canada.  The spouse, if there is any, shall also be of  the same required age. 

  2. Guarantee assets must be owned by the borrower or joint-borrow without  any mortgage while the borrower shall be living there by not least than the required period, i.e. in South Korea it is by at least six months in one year, except the person  needs to stay in a home-care center for a long period of time.  

  3. The borrower must be able to cover all required expenditure for the guarantee asset, i.e. insurance and other public utility fees, otherwise the borrower might receive less payment each time since the relevant financial institute needs to keep a certain portion to cover those aforementioned expenditure.  

  4. Under the mortgage years, the borrower shall continue to own and live in the house until the last living moment.  The bank shall then take the house for auction.   If there is any money left after all deducted expenditure the eligible heir shall receive  that money.  In the case of a longer staying than being expected the bank  shall own all left over money while the heir shall be allowed for redemption. 

In conclusion the reverse mortgage is another tool to help all elders in the Thai society while supporting the public policy to provide welfare for senior citizen since it transforms life-long asset into the retirement fund without asset selling and sparing burden for their children, more or less. 


However, following risky issues should be considered by both the financial institute and the borrower  

  • Borrower’s risk include rising interest rate in the future which might effect the contracted monthly payment.  If the borrower happens to live for longer period he/she might face shortage of living funds.

  • Financial institute’s risks are mainly based on net selling-value of the assets (after deducted expenditure) which are insufficient to cover debt payment. 
     

Eventually, the borrower must carefully study the product prior to enter the reverse mortgage contract to ensure the expected requirement.  A good financial plan is still in need despite mortgage payment to enhance sufficiency living without more indebted burden so that one would be of a happy life ending.