Unless you’re willing to live with your parents forever or have had a look at rental prices and not had a heart attack, you’re going to have to fork out the cash for a home sooner or later.
But after spending all of your money on your home, what happens when you get old and need some cash to retire on? Do you really want to rent out your rooms to strangers with questionable hygiene habits or downsize and move to some ulu neighbourhood?
That’s where the DBS Home Equity Income Loan comes in. In cooperation with the CPF Board, DBS has launched this new loan to enable private property owners to monetise their homes without having to sell them.
Let’s have a look at what the scheme entails and whether it’s worth considering.
What is a home equity loan?
A home equity loan, also known as a reverse mortgage, lets you borrow money against the value of your property.
Now, why would you need to do that? Well, putting up collateral (in this case, your home) enables the bank to offer you a lower interest rate. That’s why your home loan interest rate is so much lower than, say, interest on an unsecured loan like a personal loan. The bank is willing to offer you a lower interest rate because if you don’t pay up they can swoop in and sell your home.
Home equity loans enable you to offer your home as collateral so that you can borrow money at a lower interest rate. You can then use this money to supplement your retirement income, pay for a face lift, etc.
By the way, home equity loans are meant for private property owners. HDB flat owners, on the other hand, can turn to the HDB Lease Buyback Scheme, which is somewhat similar.
Like any other loan, you should pay attention to the interest rates and compare across many loan providers and packages before signing up for a home equity loan. In other words, don’t grab the first product you see on the shelf, as there might be cheaper ones lurking elsewhere.
How is the DBS Home Equity Income Loan different?
The DBS Home Equity Income Loan is a joint offering between the CPF Board and DBS. As the gah’men is involved here, you can be sure the scheme will be restricted to the groups being targeted by the powers that be.
In the case of this new loan, the target group is seniors who are asset rich and cash poor, and need to boost their retirement income.
As such, it is restricted to Singapore Citizens and PRs aged 65 to 79, who only own one fully paid-up property with a remaining lease of at least 30 years. Applicants are not allowed to own any other property in Singapore or overseas.
The biggest difference between this new loan and your regular reverse mortgage is that the money borrowed through the loan will be disbursed not in cash, but through monthly payouts from CPF LIFE. So, you won’t have a wad of newfound cash to spend at Singapore Pools.
How much can you borrow with the DBS Home Equity Income Loan?
The maximum loan amount is capped at the difference between your CPF Retirement Account (RA) balance and the Enhanced Retirement Sum (currently $279,000).
For example, if your Retirement Account currently has $200,000, you can borrow up to $79,000. This $79,000 will go towards your CPF LIFE premium, which would increase your monthly payouts. CPF LIFE payouts are for life, so you don’t need to worry about your extra $79,000 “running out”.
Note that if you’ve already hit the Enhanced Retirement Sum in your CPF RA, you won’t be able to participate in the scheme.
It’s also worth noting that, unlike a regular home equity loan, you don’t need to repay the loan unless you sell your property (in which case you will need to repay the money borrowed with interest).
Since you don’t need to repay the money, what do they take instead? Your soul?
Nope, at the end of the your loan (which lasts until you reach 95), the bank will sell your property and use the sales proceeds to pay off the loan. If you have family members hoping to inherit your legacy, they will receive any cash left over, or can choose to repay the bank loan if they wish to retain the property.
DBS Home Equity Loan vs HDB Lease Buyback Scheme
The DBS Home Equity Income Loan is actually the private property version of the Lease Buyback Scheme for HDB flat owners.
The HDB Lease Buyback Scheme enables people to sell part of their flat’s remaining lease in exchange for CPF Retirement Account top-ups. If the person is enrolled in CPF LIFE, he or she will receive monthly payouts for life.
Although its mechanics aren’t identical, the DBS Home Equity Loan likewise aims to offer private property owners with a similar way to unlock retirement income from their properties.
One key difference is that the DBS Home Equity Loan is more flexible. The borrower can choose to sell the property and repay the loan at any time during the loan. Meanwhile, those who’ve sold part of their lease via the HDB Lease Buyback Scheme cannot change their minds and repurchase the years they’ve given up.
Things to note about the DBS Home Equity Income Loan
Here are some key figures concerning the DBS Home Equity Income Loan:
- The maximum loan tenure is until the youngest borrower turns 95.
- A fixed interest rate (currently 2.88% pa) will be locked in throughout the entire loan period.
- The minimum loan tenure is the difference between your CPF Retirement Account balance and the Full Retirement Sum ($192,000 in 2021)
- The minimum loan tenure is the difference between your CPF Retirement Account balance and the Enhanced Retirement Sum ($279,000 in 2021)
- No penalty fees will be charged if you decide to sell the property at any time during the loan, but you will have to repay the money disbursed together with interest.
Alternatives to the DBS Home Equity Income Loan
If you don’t qualify for the DBS Home Equity Income Loan or just don’t want to the money to be deposited into your CPF RA, you can opt for a different home equity loan or reverse mortgage, which will likewise let you take out a loan while putting up your home as collateral.
If you’re looking for something similar to the DBS loan, you can even opt for a package which will offer monthly payouts.
Do note, however, that a bank’s normal reverse mortgage might be less generous than the DBS Home Equity Income Loan. You might get slapped with a penalty if you choose to sell your home and repay the loan before it’s due.
On the bright side, because you get to pick from a large variety of reverse mortgages all competing for your attention, you are likely to be able to find one with a lower interest rate than the DBS loan’s 2.88%.
Should you consider a home equity loan?
Any sort of home equity loan or reverse mortgage comes with interest. Even if you intend to repay the loan only in death, the cost of the interest will be borne by your estate and affect your children’s inheritance.
Objectively speaking, the DBS Home Equity Income Loan’s current interest rate of 2.88% is high compared to home loan interest rates. But this is offset somewhat by the interest rates (currently 4% p.a.) that the money in your CPF RA will earn.
Another thing to consider is how taking out a home equity loan will affect your kids’ inheritance. If you wish to maximise your kids’ inheritance, you might want to look at other ways to monetise your property like renting out rooms.
Finally, the Home Equity Income Loan is only open to those aged at least 65. If you’ve still got a long way to go before you hit 65, you also have ample time to prepare for retirement. Ideally, by the time you retire, you’ll have a healthy enough passive income to not have to resort to taking out a home equity loan in the first place.
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