A reverse mortgage is a powerful source of income for retirees. It helps them cover daily living expenses and healthcare costs by converting their home equity into cash with no repayment of the loan until the borrower dies or the home is sold.
The new financial product fits well with Thailand, which is already an "ageing society": under the United Nation's definition, this is a society in which 10% of its population aged 60 and above.
The number of people over the age of 60 in Thailand is 11.2 million, accounting for 17% of the population, according to the government think tank National Economic and Social Development Board (NESDB).
By 2022, that number will rise to 13.6 million or 20.6%, which will make the country an "aged society", defined as one in which one-fifth or 20% of its population is 60 years old and above. Thailand's aged population will grow further to 14.6 million in 2024, according to the NESDB.
The state agency said its survey found that only 64% of senior citizens had sufficient income to comfortably live in retirement while 38% of the elderly were still working, up from 30% in 20 years ago.
Reverse mortgage is seen as a smart retirement strategy as the loan is drawn down on monthly basis, which will ensure that borrowers will have money to fund daily expenses throughout the loan term, while being able to live in their own home. Moreover, heirs are not required to repay the loan if they do not want the home and they can receive any equity beyond the owed loan when the home is sold.
The state-owned Government Saving Bank (GSB) launched the reverse mortgage product last month, the country's first lender to do so. The bank is offering 10 billion baht in reverse mortgages but has said the loan amount could be expanded if the product receives good response.
Who can apply
Those who are eligible to apply for GSB's reverse mortgages are Thais aged between 60 and 80 who own a property that is out of debt. The borrower must also be fully competent and of sound mind.
The borrower's spouse, who also has to be between 60 and 80 and has joint ownership of the home, may also apply for the loan as co-borrower, in which case, the monthly payment can be paid to one or both of the borrowers with the proportion agreed when the loan is made.
Upon the death of one of them, the bank will still make payment to the surviving spouse until he or she also passes away or the loan term ends.
Those who are on the National Credit Bureau's blacklist or declared bankrupt are not eligible for the reverse mortgage. Because loan is made based on the value of the collateral (the home), the borrower's income is not a factor for the lender in making a decision on whether to accept or reject a reserve mortgage application.
The borrower's name must also be on the household registration over the life of the loan.
The borrower will also maintain ownership of the property until they die or the loan is fully taken out. The bank will check with the Interior Ministry every three months to see whether the borrower is still alive or still have their name in the registration.
The borrower as well as the spouse and heirs are required to be informed about the terms and conditions of the reverse mortgage and sign the forms of notice before the loan can be approved.
Collateral
The property that can be used as collateral for GSB's reverse mortgage has to be a house or condominium built by property developers, owned by the borrower, has a minimum value of 1.5 million baht and no existing debt liabilities.
The home is required to be located in Greater Bangkok or capital district of other provinces; a house in a prime area that was not built by a developer, and property in city areas that are not capital districts such as Hat Yai and Pattaya could be included in the future.
Loan conditions
The loan amount, which includes principal, interests and other expenses such as fire insurance premium and mortgage fee, will not exceed 10 million baht or 70% of the appraisal value for low-rise homes and no more than 60% for condominiums.
GSB is offering a two-year interest-free period for loans approved before March 31 next year while borrowers will be subject to a flexible minimum retail rate (MMR) minus 1 percentage point for the remaining period of the loan term.
The loan term for a reverse mortgage is capped at 25 years or the length of time until the borrower's age reaches 85; if there is also co-borrower, the term will be calculated based on the younger age.
The reverse mortgage lender will make a fixed monthly payment to the borrower (and co-borrower) throughout the loan term.
The monthly payment will be taken from the principal of no more than 70% or 60% of the collateral value. Unlike a traditional mortgage which includes both principal and interest in each instalment payment, the interest of reverse mortgage will be calculated and paid only when the borrower passes away or the loan term ends.
Each monthly payment will be charged at a flexible interest rate, starting from when the first payment is made until the borrower dies or the loan term ends.
If the borrower is still alive at 85, they can request GSB to review the home's collateral value, which is likely to be higher than when they started the borrowing. The borrower then will be eligible for additional loan for another five years, at the end of which the process can be repeated if further borrowing is required.
However, if the value of the property has dropped, the borrower is still able to live in it until he or she passes away but will no longer get any monthly payment.
If the reverse mortgage borrower dies before the age of 85, the deceased's heirs will be notified and offered the choice of letting the bank sell the property or buying back the property themselves.
The deceased's heirs can either buy back the property in cash with the amount comprising the principal plus the interest payment, or they can apply for conventional mortgage from the bank.
If the new appraisal value of the property is not sufficient to cover the principal and interest paid to the borrower, to alleviate the heir's burden the bank may consider the debt settlement to be completed without seeking other assets.
Reverse mortgages are now available at GSB's branches nationwide.
