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Reverse Mortgage: A new retirement planning tool :

We are all aware of the mortgage or the housing loan that we avail of when we buy a house.

The value of a house is usually much higher than what we can afford today. By putting in some amount ourselves say around 15-20% and taking the balance from a bank as a home loan, we are able to buy our dream-house today.

This loan is then repaid to the bank together with the interest over say next 15-20 years, in the form of EMIs (equated monthly installment) i.e. a fixed amount every month.

Reverse mortgage, as the name suggests, is just the opposite. To put in very simple terms, herein you already own a house, which you mortgage to a bank. Against this, the bank pays you a fixed amount every month. In other words, the bank pays you an EMI, while you continue to stay in your house.

Therefore, unlike a home loan where you debt decrease with time, in reverse mortgage it increases as years go by - as both principal and interest increase with each payment your receive.

The important point to note here is that this loan is not repayable – at least not in cash. At the end of the mortgage period, the house becomes the property of the bank, which then sells it off and recovers its’ loan amount plus the interest from the sale proceeds.

There could, of course, be many variations to the above transaction. For example, instead of taking a fixed monthly amount you can get some amount as lump sum in the beginning. Or maybe a credit line could be set-up, against which you can draw money as and when needed. But the essential nature remains the same – you are selling your house in installments, while continuing to stay there.

Think from the perspective of old retired persons, who usually have a place to stay but not enough money to meet their day-to-day expenses. For them this option works beautifully. They get a monthly cash flow and live in comfort for say next 15-20 years, by which time they would have left for the heavenly abode. The bank then takes over the property for sale and recovery of their loan.

Therefore, by reverse mortgage we are converting a dead asset into a useful income.

National Housing Bank (NHB) has recently taken steps to introduce this product in India, though it is quite common in the US. This scheme would provide greater financial security for the elderly, especially those who either prefer or are forced to live independently in their twilight years. Now, they need not rely on their children or family or the government to support them.

This may prove to be a useful scheme in India, where more than 90% of the population does not enjoy any old-age benefits like pension or social security.

However, there are certain issues – operational, legal and emotional - which need to be sorted out, before the scheme can become popular.

Operational issues

NHB has to fix certain eligibility norms. One very obvious norm would be that you should the owner of the property (which is ideally debt-free) and you are residing in it.

Apart from this there could be age criteria. For example, in US the person must be at least 62 yrs of age to be eligible to borrow under reverse mortgage. Further, older homeowners get larger amount of loan vis-à-vis the younger borrowers.

Interest rate would be another criterion. The loan tenure is another tricky issue. NHB has proposed a maximum of 15 years; which is a debatable issue. What happens if the owners survive this period? Does the borrower get evicted?

Then, there would be the issue of valuation and the maximum percentage of age that the bank would be willing to finance.

Financing fees, insurance, maintenance, property taxes etc. would be the other minor issues that would need ironing out.

Legal issues

The necessary regulations have to be put in place. This would require new laws apart from amending some of the existing ones such as the NHB Act, RBI Act, etc.

Besides, there is a tax angle to all this. Should this amount received from the bank be treated as income (and hence taxable) or a loan (therefore, no tax)?

Further, as the experience in US shows, mortgage insurance would become important. This would protect the bank in case there is a shortfall in the sale proceeds vis-à-vis the loan amount. Otherwise, it is the lender, which bears the loss. The borrower is not asked to pay the difference, if any. Nor can he be forcibly evicted.

Emotional issues

A house is considered to be a very dear asset in India. It has a very high emotional value attached to it. Therefore, creating a debt on it will require a big change in the present mindset.

Also, house is something, which one usually leaves behind as a legacy for ones’ children. Therefore, to give it away to a bank would be another mindset hurdle to overcome.

Reverse mortgage is a new product and there are bound to be some teething problems. Not withstanding all the above issues, which seem quite challenging, the reverse mortgage is a product, which offers an option to the old people to continue to live with dignity.

Note:-Dewan Housing Finance Corporation has very recently launched one such scheme. A home owner of 60 yrs or more will be eligible to receive EMI for 15 years @12% i.e. for every Rs.1 lakh of property value, bank pays an EMI of Rs.205/month. Further, on survival after 15 years, the owner continues to stay, while the loan accrues interest @12% p.a.

2006-09-11 Source : Moneycontrol.com

NHB set to bat for reverse mortgage

The National Housing Bank (NHB) will offer guarantees to senior citizens availing of reverse mortgage facility from lenders to provide protection against any defaults by banks and housing finance companies (HFCs).
Finance Minister P Chidamabaram in his 2007-08 Budget had stated that NHB will introduce a ‘reverse mortgage scheme’ for senior citizens.
“NHB will guarantee senior citizen borrowers’ obligation to banks and HFCs to make regular payments over the period. NHB, as a RBI subsidiary, may be expected to provide comfort to senior citizens who are mortgaging houses upfront to receive payment over time. However, the guarantee will be optional and can be availed of a fee,” said S Sridhar, chairman, NHB.
Reverse mortgage allows senior citizens with inadequate income sources to mortgage their own homes for ensuring a regular stream of income for up to 15 years.
At the end of the reverse mortgage period, the owner will have the option of retaining the house after paying the principal plus interest to the lender or the lender can sell the house and pay the owner the difference between the amount due and the sale price.
NHB decided to provide guarantees as senior citizens’ organisations had raised concerns about lenders defaulting on their obligations, when the housing finance companies’ regulator held discussions in Mumbai, Bangalore and Hyderabad before designing the reverse mortgage scheme.
Sridhar said a reverse mortgage scheme has already been prepared after discussions with banks, housing finance companies and senior citizens’ organisations.
“We had circulated draft operational guidelines two months back. The ground work, guidelines and the regulatory framework is in place and each bank has to see it from its own point of view. We are willing to have further discussions and expect the real action to take place in April/May,” added Sridhar.
According to estimates, the market for reverse mortgage could be around Rs 5,000 crore. Citizens above 62 years of age will be eligible for the reverse mortgage scheme. NHB will also provide refinance to banks and HFCs to extend reverse mortgage loan.
Falaknaaz Syed / Mumbai March 02, 2007
Business Standards

DHFL introduces India's first reverse mortgage

Mumbai: India's second-largest private housing finance company, Dewan Housing Finance Corporation Limited (DHFL), is the first off the block In India with a reverse mortgage scheme.
The scheme, called 'Saksham' is targeted at retired senior citizens above 60 years of age. The scheme is similar to a housing loan except that in a home loan the borrower pays a fixed EMI to the lending institution, while in reverse mortgage the lender pays the borrower a fixed sum of money on a monthly (or quarterly) basis, the total payment being equal to the value of the property and the interest on the loaned amount.
After the death of the borrower and the borrower's spouse, the housing company sells the property to recover the amount paid out along with interest at a rate similar to interest on housing loans.
The scheme is designed to supplement the monthly income of senior citizens. This scheme is offered to retired people above the age of 60 years who own property and have been living in it for at least one year.
The loan amount is sanctioned based on the:

  • Age of the borrower
  • Average value of the property
  • Rate of interest on the loan
  • The payment method chosen by the borrower

The eligibility for a reverse mortgage loan is simple. The borrower should be 60 years of age, living in self-owned property, which is free of any other encumbrances, and is an approved construction. The amount loaned would depend on the estimated value of the property (minus the interest cost) its condition and life. The loan does not apply to ancestral property.
Saksham allows customers and their spouses to live in the property as long as they are alive, without the fear of eviction even after the tenure expires. The surplus amount is then paid to the legal heirs of the borrower. The legal heirs also have the option to re-possess the property after the demise of both customers and their spouses.
According to Shivkumar Mani, head, marketing, DHFL, "As per the guidelines laid down by NHB, DHFL is the first company to launch this scheme in India. This unique scheme is designed to help senior citizens to sustain their lifestyle and also help them maintain their monthly expenditure without being dependent on anyone. It is a social security scheme designed to benefit the senior citizens post retirement."

DHFL will first launch Saksham in Mumbai and its adjoining areas before making it available nationally.

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