An Overview of the Concept of Reverse Mortgage in Malaysia

Brandon Lim
Dec 22, 2021
2 min read

Updated: Mar 13, 2022

Similar to a conventional home mortgage, a reverse mortgage is a loan that is secured against immovable property. However, unlike a conventional mortgage, a reverse mortgage does not require the homeowner to make any loan repayments during the tenure of the mortgage. Instead, the entire loan balance becomes due and payable when the borrower passes away, moves away permanently or sells the home.

What is the purpose of a reverse mortgage?

According to Datuk Chung of Cagamas, "A reverse mortgage allows an elderly homeowner to take out a loan using his or her primary residence as a collateral. In return, they receive a steady stream of disbursement on a monthly basis while still being allowed to stay in the home."

In other words, a reverse mortgage enables a homeowner to monetise the equity in his or her property. As the loan tenure progresses, the homeowner's debt will increase whilst his or her equity in the property will decrease.

In the context of Malaysia, a reverse mortgage may help senior citizens who have immoveable properties but insufficient savings to get by their golden years by receiving payments from mortgagees against the security of their properties.

When does the amount received under a reverse mortgage become repayable?

The repayment of the loan, inclusive of interest, generally only occurs after the death of the homeowner, or when they move out or sell the house.

In the case of the demise of the mortgagor, the next of kin may opt to repay the loan and take back the property or sell the property to repay the loan and interest.

According to Datuk Chung, "If the house sells for more than the amount owed, the homeowner or heirs will receive the balance. But if the house sells for less than the amount owed ... the losses will be borne by the guarantor – in this case, Cagamas." It would appear from this statement that the form of reverse mortgage contemplated in Malaysia will be guaranteed by Cagamas. The existence of the Cagamas guarantee will effectively transfer the credit risks in the loan from the lender to Cagamas.

Closing Statement

If the primary objective of introducing reverse mortgages in Malaysia is to address income insecurity of senior citizens with inadequate retirement savings, the use of the single disbursement or line of credit options should be permitted only for specified purposes like home repairs or medical expenses, to avoid unnecessary and reckless consumption by the mortgagor.

It is also common for individuals to strive to pass down immovable properties to their future generation as a way to preserve the family wealth. Reverse mortgage may jeopardise this inheritance especially if the succeeding generation does not have the financial means to acquire their own property or to redeem the property under a reverse mortgage, which could result in a lukewarm response to reverse mortgages.

Source: Mondaq