Business Today

Reverse mortgage: Locked treasure

Senior citizens can use their homes to fund their retirement years through the reverse mortgage scheme.

Pritam P. Hans        Print Edition: October 31, 2010

A sufficiently large corpus to meet expenses, a cosy home and a peaceful existence are what most people want for their sunset years. With a wellexecuted retirement plan, it should not be difficult to achieve these goals. But what if you are left sitting in the dining room of your house, trying hard to figure out ways to meet your regular expenses or a medical exigency? In such a scenario, a reverse mortgage loan can unlock the value of your house and provide a tax-free income.

"Normally, around 50 per cent of a person's lifetime savings are spent in building a house and most old people do not have any retirement plan or social security. If they need money, they need to sell the house. Reverse mortgage is a tool by which senior citizens can liquidate the equity without having to sell it," says P.R. Jaishankar, Assistant General Manager of National Housing Bank, or NHB, a Reserve Bank of India subsidiary.

In a reverse mortgage scheme, a bank offers a loan to an elderly individual or a couple against a residential property owned and occupied as their permanent home. The borrowers get the money as lump sum or in instalments. The amount can be used to supplement their income and meet other expenses, but cannot be used for business or speculative purposes.

The loan need not be serviced during the lifetime of the borrowers as long as they continue to live in the house. After their death, the heirs to the property can either redeem the loan and retain the property or allow the bank to sell it and take the money left after repayment of the loan.

An individual borrower, who is 60 years or older, is eligible for a reverse mortgage loan, and in case of a couple, the younger borrower should not be less than 55 years (58 for some banks). The property should have a clear and transferable title indicating the borrower's ownership.

The property should also have a residual life of at least 20 years in case of a single borrower and 25 years in case of joint borrowers, where the spouse is less than 60 years old. Banks offer 40-90 per cent of the property value as loan, with an upper limit that includes the interest as well.

For example, a person who owns an apartment with a market value (as assessed by the bank) of Rs 10 lakh, will be eligible for a loan of Rs 9 lakh (90 per cent of the value of the property) under State Bank of India's reverse mortgage plan. At an interest rate of 10.75 per cent, the bank will pay him Rs 2,025 per month for 15 years. The maximum amount given to the borrower will be around Rs 3.65 lakh, the rest being the interest accrued during the tenure.

Reverse mortgage does not keep you away from the benefits of appreciation in the value of your house. The property is revalued regularly (or whenever the bank decides) to reflect the change in its market price. If the value of the property goes up, the bank offers to increase the loan amount. In case of a decline, the bank reduces the loan amount. If the borrower does not agree with the revised terms, further payments are stopped and the interest on the loaned amount keeps accruing.

If you choose to sell or move out of the property, you will have to pay the bank the entire accrued amount. If the proceeds of the sale of the house are less than the accrued principal and interest, the bank suffers the loss.

Reverse mortgage comes with certain caveats. If the borrower does not live in the house for a continuous period of one year, the bank can foreclose the loan. The borrower also needs to pay property taxes, utility bills, maintain and repair the house and keep the home insured.

Though the product was introduced in India in 2006, it is yet to pick up. During the previous two financial years, a total of Rs 1,500 crore was disbursed to nearly 7,500 borrowers. Many private sector banks do not offer reverse mortgage due to the risks involved and taxation issues. "In the United States, reverse mortgage is seen as a social security product. The property price and longevity risks are borne by the government. India is the only country to have a market-oriented reverse mortgage product," says NHB's Jaishankar. In India, cash outflows are for the banks and the inflow is only after the demise of the borrower.

The money does not come to the bank but keeps accruing in its account and it has to pay taxes on it. So, there is a gap between outflows and inflows. There is a lot of scope for innovation in reverse mortgage. Initially, NHB came up with a plain-vanilla product, with limitations on the amount of loan and its tenure. "Now, we have brought in insurers to diversify the risk. Banks take the risk of house price and insurers bear the longevity risk and make annuity payments. Senior citizens can now get bigger quanta of payments for their entire life," says Jaishankar.

Your house as an ATM

When I took VRS in 2001, my retirement benefi ts added up to Rs 22 lakh. At that time, it looked like a lot of money, but it is not if you have to repay a Rs 12 lakh loan taken for your children's weddings. After I settled all my loans, I was left with Rs 10 lakh, which was invested in fi xed deposits and annuities. But the Rs 9,000 a month I received from these investments was not suffi cient to run the household and retain the lifestyle I had got used to as a General Manager in a PSU.

You might have seen the advertisement from an insurance company, which shows a retired person trying to cut down on household expenses. He refuses point blank when his wife suggests that they ask their children for money. However, I had no option but to seek fi nancial assistance from my children who had settled abroad. But they had families to support and other commitments.

The first glimmer of hope came in 2007, when the government announced the reverse mortgage scheme. I applied for the reverse mortgage of my apartment in Delhi in 2008. My 1,000 sq. ft apartment was valued at Rs 60 lakh and the bank agreed to pay me Rs 40 lakh over the next 15 years. The monthly instalment worked out to Rs 9,600, enough for us to live comfortably. The house has become my retirement plan. Now my wife and I do not have any fi nancial worries.

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