As the Government of Jamaica awaits the imminent approval of its IMF staff-level loan agreement by the IMF Board, one may be inclined to ask, “What does this agreement mean for me and my family?” For starters, it means a restoration of stability in the foreign exchange market, as the government is scheduled to receive loan proceeds totaling almost US$2 Billion from the IMF and other multilateral funding agencies within the next few months. The loans will help shore up the country’s foreign reserves and balance of payments, which should in turn lead to inter alia improved business and consumer confidence, increased aggregate demand, lower interest rates and improved inflation expectations. These, along with fiscal prudence by the Government are some key pre-conditions for sustained growth to become a reality for the Jamaican economy. A growing economy should translate into more jobs, lower unemployment rates and increased tax revenues for the Government, which will allow the state to more effectively tackle socio-economic issues related to healthcare, education and crime.

But is that the end of the story? What about the next 5, 10, 15, 20 or even 50 years? Will the IMF deal solve all the socio-economic issues that have negatively affected the quality of life for Jamaicans for so many years? Will it allow my children and grandchildren to have a more secure livelihood by the time the calendar nears Jamaica’s 100th year of independence celebrations? What about the savings and wealth that I’ve been trying so hard to preserve for a rainy day, much more for retirement? Will I have to endure another NDX or worse, a Cyprus-like bank deposits levy in the foreseeable future? These are real, tough questions, which only God Himself can definitively answer. Incidentally, on the matter of wealth, God made a promise way back in the Old Testament of the Bible – one which is still quite relevant today;

“But remember the Lord your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your ancestors, as it is today.” (Deuteronomy 8:18 NKJV)

So in a context where man-made devices like the NDX have sought to erode some of the value of investors’ savings and investments, how can one produce wealth today as God promised? I’d like to propose that the tools to do so are very much within our reach and capabilities. How do I know this? Well, because God is the Ultimate leader – One with an un-blemished character and a track record of rock-solid integrity and authenticity. So if He promised His children the ability to produce wealth, then we can be assured that He has made the requisite tools available to accomplish same.

Possible Remedy #1

If you’re a homeowner, one such wealth-producing tool is the equity in your home. Specifically, suppose you were to access a home equity loan, use the proceeds to buy an apartment and put the apartment up for rent. Such an investment could potentially generate significant gains, provided the rental income yields a rate of return greater than the cost of the home equity loan. This ‘home remedy’ essentially converts the equity in one’s home into an income-generating resource (specifically, the extent to which the monthly rental income from the apartment exceeds the monthly loan payments), which could help offset one’s current and post-retirement financial needs.

Possible Remedy #2

Another tool one could consider is leveraging the unencumbered (lien-free) value of their home to access a reverse mortgage facility. A reverse mortgage is similar to a regular mortgage, except that it works in ‘reverse’. So instead of making monthly payments, the borrower receives monthly payments by using the reverse mortgage loan proceeds to immediately purchase a term annuity (a stream of periodic income payments). The reverse mortgage loan is generally repaid (principal plus interest) at the end of the term annuity income payment schedule by liquidating the home that is being used as collateral for the loan. Alternatively, the borrower may have the option to make alternative arrangements to repay the loan when it matures if their intent is to maintain ownership of the home at the end of the term annuity income payment schedule. The wealth-producing element of this ‘home remedy’ kicks in only when the present value of the term annuity income payments exceeds the present value of the maturity amount of the reverse mortgage loan.

Apart from the income-generation benefits of these home remedies, there are some other positive spin-offs. On a micro-scale, these remedies give aspiring and existing homeowners a unique opportunity to create a wealth-producing resource – one that can offset current and post-retirement financial needs. On a macro-scale, these remedies have the potential to pave the way for the establishment of a formal local secondary market for mortgage-backed securities (for example, similiar to what the US government sponsored enterprise Federal Home Loan Mortgage Corporation was established to do in the US financial sector). A secondary market for mortgages would facilitate a deepening of the local financial sector as well as provide another funding source from which aspiring home owners could access low-cost mortgages.

Having due consideration for all the risks involved (which a licensed financial advisor or mortgage officer can provide in more detail), these ‘home remedies’ could avail yet another viable source of investment portfolio diversification for retail and institutional investors alike.

Odean White is the Treasury Manager at RBC Royal Bank (Jamaica) Ltd.