Tan May Ping
Sat, Nov 22, 2008
The New Paper
Falling prices scuttle couple's reverse loan
THEY once lived in this 350-sq-m semi-detached, house along Upper Serangoon Road.
Then an outstanding home loan forced them to sell it and the elderly couple now live in a rented HDB flat.
Madam Ng, 56, recounted how they had to vacate their landed property, where they had lived for 31 years.
She now works in the sales line. She spoke on condition that we use only her surname.
She said that her husband, who is in his 70s, gets upset whenever the topic is brought up.
The financing scheme seemed like a safe bet to the couple back in 1997.
They were to receive $2,000 a month from NTUC Income under its newly-launched reverse mortgage scheme.
But things soured when the the valuation of their house dropped substantially and they were forced to sell their house in 2006 to repay the loan.
Ironic twist
What's more, the couple now have to pay Income about $630 a month over 10 years to cover the balance outstanding on the loan.
Madam Ng still has newspaper clippings of the scheme back then. It was mooted by the government to provide another option for older owners to get some income from their homes, without having to move out.
NTUC Income's website says of its reverse mortgage scheme: 'Unlock the cash value of your home. Provides regular cash for retirees.'
It offers an income stream for cash-poor but asset- rich retirees, who can use their houses as security for a loan dispensed in monthly cash payouts.
Madam Ng attended a seminar by Income in 1997 which was held in an auditorium.
The loan worked like this: Their property was valued at $2.1 million. Income could lend them up to 80 per cent of the valuation or about $1.68 million.
This 80 per cent loan amount is also known as the loan-to-value limit.
5 things about reverse mortgage
1. Introduced in 1997 by NTUC Income and targeted at private property owners aged 60 and above.
2. In 2006, Income began offering the scheme to HDB flat-owners aged between 70 and 90. That year, OCBC became the first bank to offer reverse mortgages to elderly private property owners.
3. There are 140 private home owners still on the scheme, and Income is currently accepting new applications for only HDB properties.
4. There are about 20 HDB flat-owners on the scheme.
5. Response to reverse mortgages has been cool due to the high interest rates. Rates are not fixed.
Income also settled an overdraft of $495,000 which the couple had taken from a bank, using the house as collateral.
Then taking into account Madam Ng's husband's life expectancy, the property value and the interest rate of 5.9 per cent per annum at that point, Income calculated that he would be paid $2,000 a month at that point.
Madam Ng said they signed up for the scheme a few days after attending the talk.
The letter of offer did not state the number of years they would receive the monthly payments, as this depended on many factors that could change.
Payment based on property market
The couple's understanding from the talk, and from the two officers they met when the deal was signed, was that Income would adjust the monthly payment accordingly when the property market went up or down, said Madam Ng.
They received the $2,000 monthly until 2004, when Income informed them that they were approaching the 80 per cent limit ' as their property value had dropped sharply.
Income reduced their payout to $1,750 in August that year.
'After that, the amount dropped every few months, to $1,500, then $1,250, then $1,000, until it finally hit $300,' said Madam Ng.
The reason was that the valuation of the house had dropped. This had been explained to the couple earlier.
In June 2006, Income's lawyer said in a letter that the loan amount due had 'exceeded 80 per cent of the market value'.
The payments stopped from July 2006.
Madam Ng said she was told by Income that the valuationwas about $1.1 million at that time.
Income calculated that the couple owed almost $1.05 million. This included the $495,000 which Income had paid earlier to clear their overdraft, plus the monthly payouts they had received and the compounded interest on these payouts.
As the couple did not have the means to repay the loan, they agreed to move out in August and sell the property.
Madam Ng said she had hoped the property market would pick up. But no one could tell when the market would turn around.
'We desperately tried to sell the house on our own, but the highest offer we had was $900,000. We had no choice but to move out,' she recalled.
Income eventually found a buyer who paid $1.05 million in November 2006.
Then in July last year, Income wrote to them stating that there was still a shortfall of almost $55,000.
It allowed them to pay in instalments - $250 a month for the first year and $630 thereafter for the next nine years.
Madam Ng said she deeply regretted not selling the property in 1997. But, at that time, they wanted to both keep the house and get regular cash payments.
Like others who had overextended themselves, the couple was hurt by the bursting of the property bubble.
If property values had kept rising, they could have sold the house, paid off the loan and have enough left over to buy a smaller home.
But when values dived, there was not enough to even pay off the loan.
'This was the worst financial decision we have ever made,' said Madam Ng.
Adjusting to the situation
The couple and their son, who is in his 30s, have since been moving from one place to another, either staying with close relatives or renting flats.
Madam Ng did not have to work previously, but she now works part-time trying to make ends meet.
While her husband, who had already retired when he took up the scheme, began driving a taxi at first.
He now takes on any odd jobs he can get.
This article was first published in The New Paper on November 20, 2008.