A smart initiative for the elderly

By Chang Chin-o and Yuan Shu-mei 張金鶚,袁淑湄  / 

Wed, Oct 07, 2009 - Page 8

Seeking to enable the elderly to have adequate money to pay their health insurance fees, Department of Health Minister Yaung Chih-liang (楊志良) has proposed the concept of reverse mortgages.

This idea has long been supported by academics researching real estate. Financial Supervisory Commission Chairman Sean Chen (陳冲) has also said the nation could soon start emulating the practices of Western countries and formulate a system for reverse mortgages.

With Taiwanese society aging, reverse mortgages have generated a great amount of interest.

Reverse annuity mortgages are a type of mortgage payment administered by financial institutions to the elderly, with the amounts disbursed based on the value of the property they own. As the elderly receive money from financial institutions each month, the system is akin to an old-age pension plan.

Reverse annuity mortgages have been used in the US for a while and the US has a certain level of experience implementing them. Applicants there must be house owners above 62 years of age. Applicants can apply with financial institutions for a mortgage loan based on the value of their house. On passing an evaluation, the home owner can choose whether to receive a one-off payment in cash, cash payments each month or a combination of these two options. The date of termination of the home loan is when the borrower sells the house, dies or lives in another residence for more than one year. If a borrower sells his house and the sale price is higher than the original loan, the difference belongs to the borrower. If the sale price is lower than the loan, financial institutions cannot collect debt from the borrower or their children. According to data released by the US Department of Housing and Urban Development, the US had more than 110,000 reverse mortgage clients last year.

While Taiwan has a high home ownership rate, many elderly have real estate but no money to live on. Such people often have to ask their children to cover their living expenses. If their children are less than filial, this often leads to argument. After the elderly die, their children inherit their real estate assets and enjoy the wealth that took their parents a lifetime of hard work to build.

It is also hard for the elderly to ask their children to help cover their living costs in a dignified manner. The mechanism proposed above would allow the elderly to rely on themselves while ensuring they retain their dignity.

For example, if a 65-year old owns a house worth NT$5 million (US$155,000), with a standard loan of 60 percent of that value, that person would be able to take out a mortgage of NT$3 million. Based on Taiwan’s average life expectancy of 79 years and at an annual interest rate of 2 percent, this person could receive approximately NT$20,000 per month until he or she passes away.

Aside from adopting this mortgage loan concept, Taiwan could also adopt the zero net present value concept. This would involve elderly people selling their real estate assets to insurance companies and then renting back from them, similar to the sale-leaseback mechanism commonly used in real estate. By doing so, the elderly would not have to move house, while their insurance company would be responsible for repairs and management of their house. Beneficiaries could also use the money insurance companies hand them each month to cover living costs.

If an insurance company buys the house of an elderly person for NT$5 million and rents it back for NT$14,000 per month, a 65-year-old could receive approximately NT$20,000 per month after rent. Under such a system, beneficiaries would not have to worry about upkeep fees or the risks of losing money associated with buying or selling property.

Promoting reverse annuity mortgages would give the market one more financial product and help change the traditional Taiwanese concept of raising children to act as a safeguard for old age. Under this system, a house would serve as a safeguard after retirement. Furthermore, with Taiwan’s high homeownership rate, low birth rates and aging society, such a mechanism would be easy to promote under current policies. Supplementary policies would nevertheless be necessary, as would the establishment of a comprehensive quotation system for housing prices and an insurance system ensuring cooperation between banks and insurance companies.

Chang Chin-o is a professor in the Department of Land Economics at National Chengchi University. Yuan Shu-mei is a doctoral candidate in the department.