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Make your house pay back

Reverse mortgage is ideally suited for senior citizens who are asset rich but cash poor.

By Shivkumar Mani        Print Edition: November 16, 2006

India has close to 80 million individuals who are 60 years or older, as per the 2001 census. In urban centres, the ratio of such senior citizens (who are 60 years and above) would be higher than in rural areas because these citizens have access to better quality health care and a better standard of living. Increasing expectations on the quality of life would fuel a massive demand for financial products for the elderly citizens of this country. These products could be aimed at meeting some or all of the following aspects of financial security—safe investment avenues and imparting liquidity to otherwise illiquid assets.

Existing savings instruments for the elderly have not been able to adequately address their need for a steady income stream after retirement. Decreasing returns on long term bank deposits and inadequacy of pension schemes led to a consistent depletion of savings accumulated over one’s working life. Even government-backed pension schemes convert only the financial savings accumulated during working age into income streams in old age.

WHAT IS REVERSE MORTGAGE?

A method of creating liquidity out of an otherwise illiquid asset like property.

The owner gets a steady income based on the value of his property.

HOW IS IT DIFFERENT FROM A HOME LOAN?

In a home loan, the borrower starts with a large loan and low equity in his house.

As he pays his EMIs, he reduces his loan and increases his house equity.

In reverse mortgage, a customer starts with a very high equity in his house.

As he keeps getting an annuity from the lender, his ownership of house comes down.

WHO IS IT SUITED FOR?

Only senior citizens above 60 are eligible.

Best suited for elderly people who have property but no regular income.

People who have no children or are living alone (widowers and widows) would especially find this useful.

It did not help that with growing disposable incomes of the urban middle class and increasing avenues for consumption expenditure, a retired individual found it difficult to keep up with the demands of life in urban India. However, a considerable amount of savings is locked up in residential property acquired during an individual’s working life either through own savings or through home loans from banks or housing finance institutions.

To the extent savings during working age is locked up in residential property, it cannot be capitalised for old age except through selling or moving out. This would be the case even if traditional loans were taken against house property (mortgage loans) as they have to repay the loan through instalments or on maturity.

Till recently there were no avenues for unlocking equity in a residential property into a steady income stream for the owners— predominantly individuals who have either reached the end of their working life or have recently entered the retirement phase. The answer to this problem is a financial scheme termed reverse mortgage.

A conventional home mortgage (what we term as a home/housing loan) is a forward mortgage and is dependent on the customer’s (borrower’s) ability to repay the loan over a defined period of time.

A reverse mortgage is a method by which one can create liquidity on an otherwise illiquid asset like property. A reverse mortgage enables a customer to create a steady income stream based on the value of the property he is living in without having to make any repayment till he is alive, the property is sold or the owner moves out.

Reverse mortgage is a simple and powerful tool devised to help supplement the income of the retired and elderly by unlocking the value of a residential property. Reverse mortgage has been in existence in Europe for years and the modern version of this scheme was introduced in the US with the federal government’s support in the late 1980s.

In a conventional home loan, the borrower starts with a large loan and low equity in his house. As he pays his regular mortgage instalments, he reduces his outstanding loan amount and increases his house equity.

In contrast, a customer of reverse mortgage starts with a very high equity in his house. The lender extends a non-recourse loan secured by the house property. The borrower may choose to receive the proceeds through a lump sum at the beginning, monthly payments till a fixed-term or a combination of both.

The borrower need not move out of the house or make any payment to the lender, as long he is alive and continues to live in the house or does not sell it. Therefore, the loan and interest accumulate till maturity. There is no credit or income requirement to be satisfied. Hence reverse mortgage is a case of rising debt and falling equity.

Understandably, the amount of loan will be a function of age of the borrower and any co-applicant, the current value of the property and expected property appreciation rate, the current interest rate and interest rate volatility and closure and servicing costs.

Dewan Housing Finance Corporation Limited (DHFL) introduced the concept of reverse mortgage in India with the launch of the Saksham scheme. Saksham stands for dignity, independence and self reliance. The product has been designed to help senior citizens lead a dignified and independent life without compromising on their lifestyle.

With rising life expectancy, India’s senior citizens are finding themselves in a unique situation whereby they are asset rich but cash poor. This predicament is particularly true in metro cities and in major urban centres of India. Individuals, who are 60 years and older, have substantial portion of their savings locked up in residential property, but not adequate liquidity to service their post retirement needs. Urban centres in Kerala, Chandigarh, Tamil Nadu, Andhra Pradesh, Karnataka and the metro cities find many takers for this product.

It requires near total equity ownership of the house—more likely for ages above 60. In its current form, the scheme is offered only to retired persons who are 60 years or older. It is attractive to only people with insufficient current income and little financial savings. For a given property value, the lower the life expectancy (older the person is), higher is the additional income through a reverse mortgage scheme. Having said that, it is important to note that reverse mortgage is not about putting too much money into the hands of the beneficiary, but a method to help supplement current income. Ideally, a reverse mortgage scheme should give an incremental income of not less than 20% of current income.

The elderly are particularly likely to attach significant psychological and sentimental value to “ageing in place” without having to move out. In fact, the longer they have stayed in their current home, the more valuable this is likely to be, considering the benefits of living in a familiar neighbourhood.

Reverse mortgage is best suited for the elderly (those above 60 years) who own a considerable property but do not have a high level of income after retirement. The scheme is designed to enhance income substantially. People who have no heirs or are living alone (widowers or widows) can lead a comfortable life by going in for reverse mortgage of their property.

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