NAVIGATING THE MINEFIELD OF EQUITY RELEASE PRODUCTS FOR ELDERS

• Published date: 01 December 2014
• Author: Nelson GOH1 LLB (Hons) (National University of Singapore), LLM (New York University); Advocate and Solicitor (Singapore); Adjunct Research Fellow, Centre for Banking and Finance Law, National University of Singapore.
• Date: 01 December 2014
• Citation: (2014) 26 SAcLJ 461

It is widely accepted that Singapore will face a substantial increase in elders in the coming decades. Government policies on pension and housing have resulted in a high proportion of asset-rich but cash-poor elders. In response to similar situations, markets in Australia and the UK have introduced equity release products. These financial products allow the value of the property to be monetised, thereby providing liquidity to elders during their silver years. Yet, elders are a vulnerable class of consumers, and to deal with the legal issues arising in relation to equity release products, Australia has responded by introducing legislative and regulatory protection, and the UK, with some amount of regulatory oversight, has left it to self-regulatory bodies. This article seeks to analyse the legal issues in relation to such products and compare the current legal and regulatory framework in Singapore with that in Australia and the UK.

I. Introduction

1 The 2013 Population White Paper1 (“PWP”) released by the National Population and Talent Division of the Prime Minister's Office highlighted the fact that Singapore had reached a turning point in its population trend. According to the PWP, Singapore would soon experience a significant age shift between 2013 and 2030, with close to

900,000 baby boomers,2 a quarter of the current population, entering their silver years during this period.3 As a result of the growing awareness of Singapore's ageing population, there have been multiple calls for more elder-friendly policies and regulations, particularly in the areas of healthcare and cost of living.

2 The issues faced by an ageing population are not unique to Singapore. To ensure that elders4 are able to meet costs of living, markets in Australia and the UK have responded by introducing equity release products.5 Broadly, such financial products allow real property assets to be monetised. There are broadly three types of equity release products:6 (a) a reverse mortgage, where the consumer borrows money on the value of equity in his or her home, and the principal and interest are not payable until the home is sold, usually upon death; (b) a home reversion scheme, where the consumer sells part of his or her home for less than market value but is allowed to remain in the property until he or she dies or vacates the home voluntarily. The financial institution and the homeowner both benefit from any increase in the property price;7 (c) a shared appreciation mortgage, where the consumer gives up the right to some capital gain on his or her property in return for paying reduced or no interest on his or her borrowings.

3 The attraction of equity release products is that an elder borrower is not required to make payment on the loan amount during his or her lifetime. Such products are particularly welcomed by those in the baby-boomers bracket who have amassed wealth in the form of real property. These products are also particularly attractive to asset-rich elders who have retired from full-time employment but require liquidity to fund regular day-to-day expenses or lump sum payments for one-off expenditure such as vacations, vehicle purchase, emergency funds, home improvement, nursing or health care.

4 Whilst not commonplace, the reverse mortgage is not entirely new to the Singapore market. It surfaced in the late 1990s but did not find traction in the local market. Nonetheless, the growth of such products in Australia and the UK, and the re-appearance of such products in the form of the Lease and Buyback Scheme for public housing, suggests that equity release products are likely to increase in popularity in the coming years.

5 In the sections below, this article seeks to outline the likely importance of equity release products to Singapore's elder population and the nature and function of equity release products. It also seeks to analyse how foreign markets in Australia and the UK have dealt with the legal issues arising from such products and provide suggestions on how to strengthen Singapore's legal framework to prepare for the likely increase in such products. It should be pointed out that prior to the introduction of regulatory protection, issues related to equity release products in Australia and the UK such as those relating to contract formation fell to be determined by common law principles. Equity release products were not treated differently in law, and cases involving equity release products did not form a unique body of case law which merits mention in this article. As a result, the focus of this article shall be on the legislative and regulatory changes in Australia and the UK specific to equity release products.

II. The demographic landscape

A. Housing and housing finance in Singapore

6 A survey of the social landscape suggests that the time is ripe for the introduction of equity release products in Singapore.

7 Several population trends point to the need for new means to support the elder population. First, the growth in the number and proportion of elders in Singapore would mean a corresponding decrease in the number of working-age adults.8 According to studies conducted, the PWP states that the current ratio of working-age to retired adults is about 6:1, and disregarding population increase through immigration or other unforeseeable factors, this ratio is likely to dip drastically to 2:1 in the year 2030. Evidently, the burden of economic activity would heighten for those in the working-adult band in 2030. Barring any large-scale policy changes, as much as a third of Singapore society in 2030

would be past the age of 65. Unsurprisingly, the Government has thus alluded to the possibility of rising taxes, which will be part and parcel of a heavier economic load on the working-age Singaporean.9 Further, Singapore's life expectancy has increased from 62 years in 1970 to about 88 years in 2010.10 According to the World Health Organisation, Singapore ranks fourth in the world for life expectancy.11 The small size of the typical Singaporean nuclear family also means that the elders in this generation are able to rely on fewer persons for financial support as compared to their predecessors. The likely demographical state in 2030 raises a real concern about the economic and social resources required to sustain a decent quality of life for the population. This gives the impetus to search for new means to support the elder population.

8 The above projections are by no means neoteric. Indeed, these trends were foreshadowed in several policy papers. In 2005, the Committee on Ageing Issues (“CAI”) was set up to analyse and formulate policies in respect of Singapore's ageing population. In February 2006, the CAI released their Report on the Ageing Population.12 Emphatically, the report predicted that between the years 2006 and 2030, Singapore would “witness an unprecedented profound age shift” as persons above 65 will triple from 300,000 to as much as 900,000, which means one in five residents would be an elder.13 More intriguing was the call for the Government to provide elder-friendly housing through means such as “work[ing] with market players to offer reverse mortgage schemes for the elderly HDB flat leases at commercial terms”.14 Indeed, ch 3 of the report dealt with the topic of elder-friendly housing, and emphasised the need to allow elder residents to “age-in-place”, that is, to allow them to be resident where they are so as to reduce

the environmental changes in their silver years.15 Part of this push to allow elders to age-in-place is to allow them to monetise their real property.16 The harbingers have clearly sounded out the generational tectonic shifts and the need to adapt to these changes.

9 The call for suitable responses to Singapore's ageing population is made more pressing due the unique nature of pension schemes in Singapore. In the 1950s, the Singapore government introduced the Central Provident Fund (“CPF”) system which is a compulsory retirement savings scheme.17 Under the system, both employee and employer are required to contribute a portion of the employee's monthly salary to his or her personal CPF account. By and large, the bulk of moneys paid into each worker's CPF account is only to be released upon the retirement of the individual. Parallel to the CPF scheme was the Government's push for homeownership. Singaporean workers who wished to purchase public housing from the Housing and Development Board (“HDB”) were allowed to apply their savings in their CPF accounts to purchase public housing. The policy motivation was that bolstering home ownership would in turn foster a sense of public responsibility and public spiritedness. Currently, CPF moneys may also be used in the purchase of private housing.

10 The twin result of the CPF scheme and the policy to allow CPF moneys to be utilised for property purchase has resulted in a high level of home ownership in Singapore. According to statistics from the Ministry of National Development (“MND”) in 2013, home ownership in Singapore has tripled in the past 50 years to hover at 90%.18 This has led Singapore to have one of the highest home ownership rates in the world. Other developed nations fall significantly short, with Australia at 69%, the US at 66%, the UK at 64% and Japan at 61%.

11 The corollary of this is that much of an average Singaporean's assets are represented by his real property. Relative to total assets, the average Singaporean's ratio of household residential property to total assets is 51%, which, for instance, is higher than the average citizen in the US (28%), the UK (34%) and Japan (40%).19 Indeed, according to the Government's State of the Elderly report in 2008/2009,20 about 70% of those surveyed aged 55-74 identified their owner-occupied homes as their most important assets, above fixed deposit and other types of saving accounts.

12 Unsurprisingly, according to statistics from HDB, about 81% of the...