Treasure House

Pritam P. Hans   Delhi     Print Edition: October 2011

Your house accounts for a large chunk of your lifetime savings. It need not only be a home to your family. It can also be part of your retirement plan. A reverse mortgage loan will help you unlock the value of your home to generate a regular income or take care of an exigency.

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Owing to various reasons, you might have failed to build an adequate corpus to meet your expenses when you are no longer earning. Or, there might be some unforeseen expenses for which you need money. You need not sell your home to raise the money. In your sunset years, a reverse mortgage loan can convert your existing house into an alternative retirement corpus, even as you continue to live in it during your lifetime.

Earning Member
A home owner above 60 can reverse mortgage a self-occupied house and get a one-time payment or a regular income from lenders. In case of couples as co-borrowers, the younger borrower cannot be less than 55. Unlike a conventional home loan, a reverse mortgage borrower starts with high equity in the house. With every payment by the lender, the borrower's equity in the house keeps declining over the tenure of the loan.

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Though one may opt to repay the loan at the end of the tenure, it is not required to be serviced during the lifetime of the borrowers as long as they continue to live in the mortgaged house. After the death of the borrowers, their heirs have the option to repay all dues to the lender and get the ownership of the property.

If the heirs refuse to repay the loan, the lender recovers its money by selling the property. Any money left after the settlement of the loan amount is returned to the legal heirs. If the proceeds of the sale are less than the accrued principal plus interest, the bank takes the loss.

How reverse mortgage annuity plan works?
Lenders offer loans up to 40-90% of the market value of the property under this scheme. There is a cap of Rs 1 crore on the loan amount. At present, reverse mortgage loans are available at 10-13% rate of interest. You can repay the loan prematurely without any pre-payment penalty if the loan is not being taken over by another lender. The loan tenure, which can be between 10 and 20 years, depends on the age of the borrowers. For example, if the age of the younger borrower in case of a joint loan, is between 60 and 68, State Bank of India (SBI) offers a loan for 15 years. If the younger borrower is older than 68, the tenure is limited to 10 years.

Lifetime Annuity
Thanks to the tie-ups between lenders and insurers, the loan tenure should not be a cause for concern. Star Union Dai-ichi Life Insurance offers reverse mortgage-enabled lifetime annuity plans. The scheme has three options: life annuity without return of purchase price or the amount spent to buy the annuity plan; life annuity with return of purchase price, which will be used to buy annuity for the spouse on death of the primary borrower; and life annuity with increase at a simple rate of 5% per annum and return of purchase price. The lifetime monthly annuity payable under the scheme for Rs 10 lakh is Rs 6,256, Rs 4,631 and Rs 3,149, respectively.

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Reverse mortgaging will not deprive you of the benefits of appreciation in the value of your house. Your house is revalued every three-five years and the loan amount is adjusted accordingly. If the value of your house increases, you will get a higher monthly income or an additional lump-sum payment. In case the market price of the property declines, the lender will reduce the loan amount.

Reverse mortgage loans come with certain caveats. You need to continue living in the mortgaged property. If you do not live in the house for a continuous period of one year, the bank can foreclose the loan. You also need to pay property tax, maintain the house and keep it insured.

Road Ahead

The reverse mortgage scheme was introduced in the country by the National Housing Bank in May 2007. Even after more than four years, the scheme is still at a nascent stage, but it is slowly gaining popularity.

"In the absence of state-sponsored social security system in our country, a large population is left without any resources after retirement. They can unlock and utilise their lifetime savings invested in their house," says J. Rajasekhar, deputy manager, group business (distribution), Star Union Dai-ichi.

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Reverse mortgage faces several hurdles before it can gain wider acceptance. People fear losing their property during their lifetime or burdening their heirs with debt. Lower repayments vis-à-vis property value also act as a major disincentive for borrowers.

A reverse mortgaged house cannot be given on rent. "The self-occupied property mortgaged to the bank is not allowed to be rented out until the loan is fully repaid, eliminating the scope of any future income to the borrower from renting the property," says Bhaskar Niyogi, chief general manager (real estate, habitat and housing development), State Bank of India.

The growth of reverse mortgage loans has also been stunted due to cautious approach by banks. Borrowers who opt for the loan without any intention of getting back the property from the bank may not maintain the property properly and avoid payment of property tax. "To avoid being left with a 'property turned lemon' at the end of the loan tenure, banks exercise extra caution while offering reverse mortgage loans, which further impairs the growth of the product," says Niyogi.

Despite the shortcomings and hurdles in proliferation of reverse mortgage, you can always rely on your house to enjoy your sunset years even if your retirement corpus falls short. Enjoy a hassle-free retired life in your home.

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