Wednesday, April 24, 2024
HomethailandgeneralAnother payment stream for retirees

Another payment stream for retirees

The global population has increased rapidly in the last 30 years, while two-thirds of people older than age 60 are in developing countries, especially in Asia.

According to data from the World Health Organization and the UN, Thailand became a “fully aged society” in 2021 as 20% of its population is age 60 or older.

GREYING POPULATION

Thailand is projected to become a “super-aged society” in 2031 when 28% of its population is 60 or older.

Data from the Department of Older Persons in the Social Development and Human Security Ministry revealed up to two-thirds of Thai elderly do not have sufficient savings or income to support themselves. Those with savings of more than 1 million baht account for only 5% of the Thai elderly.

This segment of people and the government need to prepare a savings plan for their retirement years.

The government utilised various financial tools to address the needs of this growing demographic, including setting up the National Pension Fund Act, which requires every business in Thailand to set aside provident funds for employees, and a National Savings Fund to encourage savings among informal workers.

Another mechanism can provide funds for people who have not saved enough for retirement. A reverse mortgage switches the traditional payment stream as the lender makes payments to the borrower, with home ownership serving as collateral.

Paninee Manosan, deputy managing director of the credit group at Government Housing (GH) Bank, said reverse mortgages are one of the bank’s policies to support the elderly as the country becomes an ageing society.

In three years of offering this service, only 99 customers have used it, she said.

Customers are concerned about ownership rights of the property when the loan term ends, as most people intend to pass on their homes to the next generation as an inheritance, said Ms Paninee.

This pattern may be changing. Younger professionals may not wish to own a family home far from work and lacking modern features, she said.

Some prefer to buy a condominium or small townhouse in or near a city, able to sell and move if their family or work circumstances change. Over time, demand is expected to increase for reverse mortgage loans, said Ms Paninee.

Government data revealed up to two-thirds of Thai elderly do not have sufficient savings or income to support themselves. Apichit Jinakul

HOW IT WORKS

The product offers up to 50% of the appraised value of a house and up to 30% of the appraised value of condo unit.

The bank pays a monthly amount to customers for the term of the contract.

Given the future value of money, including the interest burden, the 50% rate of the appraised value of a house is actually equal to 95% of the current appraised value, she said.

Reverse mortgages are targeted at people 60 and older who fully own residential properties without debt and need a steady stream of cash, said Ms Paninee.

At the end of the contract, customers have two options: redeem the house from the bank or sell the house in a public auction.

Any excess amount from a sale is remitted back to the borrower or his or her heirs. If there is a loss, the bank bears the burden.

For example, a house appraised at 3 million baht would qualify for a reverse mortgage of 1.5 million baht for a customer aged 65, under a 10-year contract, which is equivalent to 120 months. The customer would receive a 12,500 baht monthly loan payment for 10 years.

She said the bank plans to showcase its reverse mortgages at money and banking exhibitions, aiming to educate the elderly in preparation for retirement.

TERMS AND CONDITIONS

If the borrower dies before the contract ends, the bank will notify the heir listed in the contract. The heir has the right to redeem the residence with cash or request an additional loan, said Ms Paninee.

The reverse mortgage loan offers an interest rate of 6.25% a year for the duration of the contract. The interest is accrued to the end of the contract, at which point the borrower or heir must pay the principal and accumulated interest to own the house.

If the borrower or heir decides not to redeem the loan, the borrower is still entitled to stay in the house until death, with the interest burden continuing, she said.

To apply for a reverse mortgage, the residence must be debt-free and not rented out or used for another purpose apart from living.

Loans can have a maximum term of 25 years and bank credit is capped at 10 million baht per loan.

Seven customers have applied for reverse mortgages worth 10 million baht, and three of them have been redeemed, said Ms Paninee.

For married couples, spouses must have joint ownership of the property. If one spouse is not named on the land title deed, his or her name must be added to the deed before applying for a loan.

GH Bank targets offering 30 reverse mortgage loans per year. Chanat Katanyu

PUBLIC EDUCATION

The majority of Thais are unfamiliar with reverse mortgages as it is a new product, she said. Thai society is still characterised by extended families living together, with the house passed on as an inheritance to family members or other heirs.

However, GH Bank anticipates within 10-20 years reverse mortgages could become more popular as more elderly homeowners will be single or married without children.

The fixed annual interest rate of 6.25% is not considered expensive in an environment of elevated rates, said Ms Paninee.

While the bank could incur a loss, the product was conceived as a government policy to help retirees with limited income to use the value of their homes to pay for basic living expenses and healthcare, she said.

GH Bank allocated 1 billion baht for the loan scheme. Loans worth 233 million baht have been disbursed since 2019.

Since 2021, the bank has organised training to increase public understanding of the loans, particularly among the elderly.

These sessions have drawn considerable interest from the public, said Ms Paninee.

RISK ASSESSMENT

The bank considers a maximum loan amount of 50% of the appraised value appropriate as there are significant risks with the product, she said. Lenders are more exposed to property value risk than with forward mortgages, said Ms Paninee.

As there are no repayments before maturity, reverse mortgage loans grow more quickly than forward mortgages. In addition, the loan balance may eventually exceed the property value. From the lender’s point of view, this is negative equity, meaning a loss, she said.

GH Bank launched reverse mortgages in 2019 for Bangkok and metropolitan areas. In 2020, it expanded to large cities in 14 provinces, such as Chiang Mai and Khon Kaen. The bank currently offers the product nationwide.

Properties to be used as collateral must be located in a community, municipality, commercial area or area with high market liquidity, according to the bank.

The US offered the first reverse mortgages in 1988 and ranks as No.1 for the product. They are also available in Japan, South Korea, Singapore and Hong Kong.

GH Bank targets offering 30 reverse mortgage loans per year, said Ms Paninee.

In terms of appraised values for the loans, 45% have been 5 million baht or less, 35% are more than 5 million baht up to 10 million, and 20% exceed 10 million baht.

GH Bank assigns an employee to visit a customer’s residence for assessment. If it is determined the customer does not live in the residence and is instead renting it out to others, this is a breach of contract. The bank will suspend the loan and the borrower is required to close the loan account, she said.

For a commercial building used for both living and doing business, the living space must account for at least 20% of the total usable area.

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