Reverse mortgages, an idea whose time may have come for ageing society
February 07, 2014 00:00
By Srettha Thavisin
One recent social phenomenon that has been quite a worrying issue for both developed and developing states is that we are quietly yet very quickly evolving into "ageing societies".
To clarify what an “ageing society” is, we have to look at its definition. According to the United Nations, once any state has a ratio of people over 60 of more than 10 per cent of the population and those over 65 comprising more than 7 per cent, that state is classified as an ageing society.
The UN also estimates that the global population 35 years from now will include more than 2 billion people over 60 years old. That is quite astounding, isn’t it?
Our life spans are getting longer thanks to advanced medical technologies and our higher consciousness about health and well-being, while it seems that the good old days when you raised your kids and educated them and expected them to take care of your retirement are gone. The world is now so competitive that perhaps they are just too busy taking care of themselves.
That is why we are seeing in some countries such as Japan, China, and recently the United States more and more people finding their way back into job markets after having retired once. In Japan, lots of retired people work as local volunteers and administrative staff. In Germany and the US, we are starting to see some openings in very advanced factories with very low-labour-intensity jobs for retirees.
However, these are exceptions, and most retirees all around the world are still dependent on their life savings, state pensions, and their families. The reality is that not all people in their 60s are retiring with enough accumulated fortune to live on, nor are they living in a country with a well-organised public pension system.
This situation might not be that bad for the so-called baby-boomer generation, who are now in their 60s, or fast approaching that age. The baby-boomers are believed to have grown up during sustained economic growth, and they were the wealthiest generation up to that time. They also received peak levels of income, and therefore could reap the benefits of abundant food, apparel, and even real estate.
This brings us to the issue of how many baby-boomers are considering unlocking the value of their homes and finding ways to finance their retirement years. Given the decline in pensions and retirement-savings losses so many boomers have experienced, there is no doubt that home equity will become an increasingly important financial tool for them.
Retired home-owners used to have a few options. They could sell their properties and perhaps move into something smaller, in with their families, or into rental property. Another option would be to borrow against the equity of their home, but then they would have to face monthly loan payments, a difficult hurdle for some.
Luckily, in some countries, there is a financial scheme called a “reverse mortgage”.
This allows home-owners of a certain age (mainly 60 or over) to borrow against the equity in their house and pay off the loan plus accumulated interest when they die, move out, or sell the house. This means they don’t have to make payments as long as they live there. But they need to have paid off their original mortgages to qualify for this scheme.
Reverse mortgage is based on the assumption that many retirees are “house rich” but “cash poor”. And while getting old, they may face rising and unexpected medical expenses, home repairs, and other costs not covered by their pensions or benefits.
A reverse mortgage allows them access to tax-free cash without the burden of monthly payments.
The US is the biggest market in the world for reverse mortgages. In Asia, South Korea and Hong Kong also have reverse-mortgage schemes in place, but with different results. Applications for the scheme in South Korea have surged, while in Hong Kong, where home prices have doubled in recent years, reverse mortgages have drawn little interest, as retirees opt to resell their homes or rent and use the remaining cash.
As for Thailand, we may not realise that we have been classified as an ageing society since 2003. According to the National Statistical Office, people over 60 will comprise up to 14 per cent of the population within two years, 20 per cent in 12 years, and 30 per cent within 30 years.
In comparison to other countries, we are moving at a very rapid pace indeed.
I remember reading about reverse mortgages in newspapers back in 2012.
The idea was being studied in Thailand then, but so far I have not heard anything about its progress. It was then a new financial instrument that was put on the table by the Ministry of Finance.
Personally, I think it would be very interesting to see this scheme at least tested and tried.
As we have now become an ageing society and there’s no getting away from this, the best we can do is prepare ourselves to cope with the problems that will crop up with that change. And I think we need all the new social and financial tools available to deal with the issue.