BURSTING financial bubbles can mess up your life - for example, when you borrow against the money value (equity) of your home.
When property prices dive, the value might be lower than your outstanding loan sum. This is called negative equity. And it will leave you in debt even after you part with your home.
But there are schemes elsewhere which come with what is called the No Negative Equity Guarantee.
It ensures that borrowers will never owe the lender more than the value of the property when they sell it.
Such guarantees are common in Australia, which has one of the most active reverse mortgage markets. Similar guarantees are also provided in the US.
Reverse mortgages allow retirees to get regular cash payments by borrowing against the equity in their homes.
With such protection, those taking reverse mortgages in these countries are unlikely to be in the same situation as an elderly couple here.
The New Paper reported yesterday that the couple had used their semi-detached house to fund their retirement through a reverse mortgage scheme.
But their property value fell drastically, from the initial $2.1 million to $1.1 million. So when they hit a borrowing limit, they were obliged to sell their home to pay off their debt.
The sale price was not enough to cover the loan, leaving a shortfall of almost $55,000. The couple are now repaying the balance due to the lender in instalments over 10 years.
This shortfall in repayment would have been unlikely under schemes in countries like the US and Australia.
Although there are still interest rate and property value risks that could make a loan due and payable, both these countries have safeguards in place to protect borrowers from having to pay lenders more than the value of their home at the time the loan is repaid.
The Senior Australians Equity Release Association of Lenders, which oversees lenders in the reverse mortgage market, required its members to have the 'no negative equity' guarantee in their contracts from 1 Jan this year.
Code of conduct
Its Code of Conduct, which was revised last year, now contains minimum contract requirements to ensure that the 'no negative equity' guarantee stands in all cases.
The exception: When a borrower has been fraudulent or has wilfully damaged the property or has tried to sell the home without the approval of the lender.
In a statement released by the association in August last year, executive director Kieren Dell said: 'Even if a retiree defaults on the loan, the 'no negative equity' guarantee will still apply under these changes - that's powerful protection for borrowers.'
The US also accords such protection to retirees.
According to the Federal Trade Commission website, a 'non-recourse' clause, found in most reverse mortgages, prevents either the borrower or the borrower's estate from owing more than the property value when the loan is repaid.
