• Singapore residents aged 65 to 79 living in fully paid private properties may borrow against their home to top up their Central Provident Fund accounts
• The money can be used to top up CPF Life, an annuity scheme giving them monthly payments for life
• They may continue living in the property or choose to sell it anytime, and are not required to make monthly loan repayments
• Sales proceeds from selling the property will be used to repay the loan

SINGAPORE — Seniors living in private residences may be able to generate extra income from their property with the launch of a new loan scheme from DBS bank.

Unveiling what it called a market-first scheme on Monday (Aug 16), Southeast Asia’s biggest lender said that Singaporeans and permanent residents aged 65 to 79 living in fully paid private property would be able to borrow against it to top up their Central Provident Fund (CPF) retirement accounts.

This means that they are able to receive higher monthly payouts under the CPF Life (Lifelong income for the elderly) scheme — a national longevity insurance annuity scheme that provides CPF acount holders with a monthly payout for as long as they live.

Seniors who take up this loan scheme, called a home equity income loan, are not required to make monthly repayments and are still able to live in their property.

Borrowers may choose to sell their property any time. If the property’s value declines during the loan period, they will not be required to make payment to reduce the loan amount, DBS said.

The loan will last for up to 30 years or until the youngest borrower reaches 95, and the interest rate is fixed at 2.88 per cent a year throughout the loan period.

INTEREST RATE WELL ABOVE MORTGAGE RATES

Investment experts were generally upbeat over the scheme, noting that it gave seniors who may be cash-poor but asset-rich a means to monetise their home.

However, they also noted that the 2.88 per cent interest rate was markedly higher than current prevailing mortgage rates, and that descendants of the borrowers may be left with a smaller inheritance down the track.

Under the scheme, repayments need to be made only at the end of 30 years, if the borrowers have died or if the property has been sold.

The maximum loan amount seniors may borrow would be the difference between their current savings and the prevailing CPF enhanced retirement sum. For those turning 55 years old this year, the enhanced retirement sum is S$279,000.

The minimum loan size would be the amount needed to top up their retirement accounts to meet the full retirement sum, which is S$186,000 for those turning 55 this year.

Ms P’ing Lim, head of deposits, financing solutions and ecosystems at DBS, said in a media briefing on Monday that the amount of loan approved will depend on the interested borrower’s lifestyle needs, the amount of top-up required and the value of the property.

ASSET-RICH, CASH-POOR SENIORS

Ms Tok Geok Peng, head of home financing at DBS, also said that the debt servicing capability of these seniors would not be assessed, given that this loan scheme is designed for retirees.

Owing to the effects of compounding interest, a loan of S$290,000 would increase to more than S$540,000 over 30 years based on the 2.88 per cent interest rate.

Ms Tok said that the bank would ideally be looking for payment to be made in one lump sum. However, they will work with customers one year before the loan matures so that they have enough time to plan their finances and work on a repayment plan.

The bank said that more than one in three active CPF members have less than the minimum retirement sum in their CPF accounts when they reach 55 years old.

They referred to research from Wharton Pension Research Council, which showed that the average homeowner above 50 here holds 60 per cent of their wealth in housing equity.

Ms Lim said that this home equity income loan scheme allows seniors to convert their equity into something that is stable, guaranteed and it allows them to live in their homes for the rest of their lives.

SERVES SAME ROLE AS HDB LEASEBACK SCHEME

While owners of public housing flats have access to the Lease Buyback Scheme, which allows owners to sell part of their flat’s lease to the Housing and Development Board and top up their CPF retirement accounts with the sales proceeds, Ms Tok said that such an option is not available yet for private property owners.

“This is a pilot for us to obtain feedback, to gather feedback and response from customers. And if we do see demand from HDB flat owners, we would be happy to extend the coverage of the equity home loan,” she said.

Assuming one spouse of a couple who took up the loan had died, the bank will not take any action in relation to the property, Ms Tok said.

If both borrowers have died, DBS will work with the estate’s executor on possible solutions.

Any proceeds from selling the property will be used to repay the loan. For those who chose to keep the property, the bank will work with the executor on a loan repayment plan.

If the borrower outlives the loan, Ms Tok said: “We remain committed to not to take immediate action against the property, bearing in mind that, by then, the customer will be 95 years old or older. So the intent is to allow them to continue to live in the property.”

She added that the bank will work with the borrower or their family members on a possible solution.

“But we are not setting ourselves a deadline to do so, so that the family members get sufficient time to think through the various options.”

'HELPS RETIREES MONETISE PRIVATE PROPERTY'

Investment experts said that this scheme by DBS helps retirees monetise their private property better.

This is especially critical in Asian societies such as Singapore, where it is common to be asset-rich through one’s property, and cash-poor. Mr Gregory Van, chief executive officer of digital wealth platform Endowus, said that this is because property ownership is viewed as a social necessity and sign of financial stability.

He noted that the amount of CPF withdrawals for the purpose of funding property purchases have increased in Singapore.

Some loan schemes in the market already allow property owners to take some equity out of their homes. Mr Justin Tang, head of Asian research at investment advisory group United First Partner, said that one innovative aspect about this product by DBS is that it is pegged to their CPF accounts.

“This has never been really done in Singapore’s context,” Mr Tang said.

A reverse mortgage allows homeowners to monetise a fully paid property without having to sell it, and it works more similarly to a standard loan where borrowers would have to make monthly repayments.

While the experts agree that DBS is taking on a higher risk with these loans, the loan size is relatively low in comparison to the value of the borrower’s property.

In addition, Mr Van of Endowus noted that an interest rate of 2.88 per cent a year is much higher than current mortgage rates.

“However, as the interest rate of the CPF retirement account can be as high as 6 per cent per annum, the loan may attract cash-poor retirees to earn a substantial difference between the loan interest cost and CPF rates,” he added.

One possible outcome of this loan scheme, Mr Tang of United First Partner noted, was that the descendants of the borrower may get less of what they initially intended after selling off the property.

As for HDB flat owners who have the option of the lease buyback scheme to monetise their property asset, Mr Van said that it is essentially an upfront sale of the property before its lease ends. HDB owners are not able to sell their property on the resale market if they have opted for the lease buyback scheme.

The DBS scheme for private property owners, however, allows them to sell their property if they want or to retain it, even among their descendants after the owner dies.

Despite its benefits, Mr Van said that the scheme “does not help alleviate the societal challenge of increasing property prices and poor retirement adequacy”.

“There needs to be a paradigm shift in mindset around relying on property investments for retirement. More Singaporeans need to consider investing their CPF or using cash for their property, or both, while taking control and growing their CPF balance for retirement through investing,” he said.