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Reverse Mortgage
Reverse Mortgage
In a typical mortgage, you borrow money in lump-sum right at the beginning and then pay it back over a
period of time using Equated Monthly Installments (EMIs).
In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against
it). The bank in turn gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse
EMIs.
The specific format National Housing Board (the facilitator for housing finance in India) is promoting is
one in which, the tenure is 15 years and the owner of the house and his/her spouse continue to live in the
house till their death – which can occur later than the tenure of the reverse mortgage. Simply put, any
senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years.
After that, the annuity payments stop. However, they can continue to live in the house.
Any house owner over 60 years of age is eligible for a reverse mortgage.
The maximum loan is up to 60% of the value of the residential property.
The maximum period of property mortgage is 15 years with a bank or HFC.
The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per
his discretion.
The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years.
The amount received through reverse mortgage is considered as loan and not income; hence the
same will not attract any tax liability.
Reverse mortgage rates can be fixed or floating and hence will vary according to market
conditions depending on the interest rate regime chosen by the borrower.
HOW IS THE LOAN PAID?
With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no
payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.
In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan
balance. Therefore the remaining equity continues to grow.
When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The
ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.
The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold,
the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.
If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give
their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the
house, use the proceeds to settle the outstanding loan and give the rest to the heirs.
The banks have so far not indicated the interest rates. However, we can safely assume that it will not
exceed the interest rates used for loan against property – which is currently in the region of 12% to 14%.
Loan to value ratio means the percentage of loan that you will get for the value of the property that you
pledge. The typical rate loan to value ratio is 60%.
So, for e.g. If you pledge a property worth Rs. 60 L, then the loan amount that you can get is Rs. 36 L
It certainly does. Higher the age, higher the annuity! Everything else remains the same.
Secondly, the Indian banking industry caps the available loan amount at Rs. 50 L, instead of providing for
an equitable percentage of the property’s value, and limits the loan period to tenure of 15 years.
The product is still evolving and may take on new dimensions depending on how the banks wish
to present its consumer appeal.
Further, there still remains an ambiguity and anomaly regarding the 'age' at which a person is to be treated
as a 'Senior Citizen'. The Income Tax Act considers a Senior Citizen as a person of and above the age of
65 years, however this scheme says that, citizens over the age of 60 years are eligible. This aspect needs
to be fixed and uniformity is much needed at an earliest.
RISK
Property price fluctuations, particularly in the Metros and Tier I cities are one of the major risks for the
lenders. If the property value drops to such an extent that it becomes less than the loan amount, the
lenders face the risk of loss.
Interest Rate Risks & Inflation risks are other risks. Legal risks may arise if the lender if not able to bring
the underlying property to sale, due litigations and longer court procedures.
Needless to say, such scheme ought to have a plethora of Disclaimers and Fine Prints, which if not read
attentively, pose a risk to the borrower i.e. Senior Citizen.
INDIAN SCENARIO
Dewan Housing Finance Limited (DHFL) was the first to launch the 'Saksham Scheme' on reverse mortgage in
September 2006.
Senior citizens particularly from the Metros and Tier I cities are expected to take advantage of this scheme.
Given that, in India there is no definite Social Security programme, this scheme benefits the 'Asset Rich but Cash
Poor' senior citizens. Reverse Mortgage can surely be considered as a derivative instrument to hedge risk arising out
of retirement and inability to work due to old age. Considering India's population, a small proportion of senior
citizens are a huge potential for this scheme. Overall, Reverse Mortgage can be successful in India.
Taking the usual mortgage loans in lieu of your home as a security will not be feasible in the age above
50 as the repayment of the loan is not feasible. The Banks and Financial Institutions also won't be of any
help in case of no income source. This is where the house property proves as an asset and brings in
reverse mortgage that allows you to be the home owner as long as you live. Home ownership is an area
most Indians are sensitive about and reverse mortgage entitles you your house throughout your remaining
life.
According to demographic projections, reverse mortgage loan products could be a hit among the metros
and also in areas like Kerala, Tamil Nadu, Goa and Chandigarh in India. With hardly any old age social
security schemes and financial help lines, reverse mortgages have a potential market. Loans are available
in the form of reverse mortgage without any income criteria at an age where normal loans are not
available. Reverse mortgage for senior citizens is a social assurance post-retirement.
Reverse mortgage is a way of getting the benefits of your home equity by retaining the home
ownership and also without having to make any repayments. The senior citizens in India will
definitely find reverse mortgage a solution for their financial needs after retirement and help them
in regaining their feeling of independence.
ADVANTAGE OF THE
SCHEME:-
(i) The house can remain occupied by the mortgager or his/her spouse during the period of their lives.
(ii) The loan, in the form of a lump-sum or monthly installments, is not required to be paid during the life-
time of the person, mortgaging the house or his/her spouse.
(iii) The provision in the scheme for revision of the value of the house every five years when market
value rises can enable the mortgagee to get a higher amount (as loan or installments) if the value gets
enhanced.
(iv)The mortgage is to be for 15 years. If the mortgager or the spouse survives beyond this period, they
will not be evicted but will continue to live in the house till the last of the spouse survives. Of course, in
the meantime, the interest on the loan amount will continue to be charged. However, if the installment
system of loan is chosen, the installments will stop after 15 years.
(v) If the borrower or the spouse dies early i.e. before 15 years, the amount to be recovered would be only
that, which has been given to the borrower or spouse by way of loan or in installments.
(vi)If surplus remains after the sale of the property mortgaged after adjustment of loan and interest
amounts, the balance would be refunded to the heirs of the mortgager.
(vii) The heirs, if they want to retain the property can do so by paying the amount of loan with interest to
the lender bank.
CRITCISM
Reverse mortgages have been criticized for three major shortcomings:
1. Being expensive. Reverse mortgages can cost $15,000 or more to enter into, as compared with
other types of loans which often cost less than $10,000.
2. Being confusing to those entering into them. Many seniors entering into reverse mortgages don't
fully understand the terms and conditions associated with the loans, and it has been suggested
that some lenders have sought to take advantage of this. But in a 2006 survey of borrowers
by AARP, 93 percent said their reverse mortgage had had a mostly positive effect on their lives,
compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers
reported that they were satisfied with their experiences with lenders, and 95 percent reported that
they were satisfied with the counselors that they were required to see.
3. Compound Interest. Since no monthly payments are made by the borrower on a reverse mortgage,
the interest that accrues is treated as a loan advance. Each month, interest is calculated not only
on the principal amount received by the borrower but on the interest previously assessed to the
loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more
likely it is that all of the home equity will be depleted when the loan becomes due. That said,
with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value
of the property and cannot pass on any debt from the reverse mortgage to any heirs.
With the growth of the ageing population, old age security has become one of the prime concerns for the
Indian government. The PFRDA Bill and other such measures provide a solid ground for this assumption.
Even the establishment of IIMPS for micro pensions for the people of the unorganized sector is in the
same direction.
All these measures are good for people who are into their working life and thus can save for their
retirement now. But one of the segments which have been left is the one who are in their retirement phase
and who may not have enough cash to sustain their life. Pension by Central and State Governments are
not enough to sustain them. These people may not have enough income or saving in cash but may have
assets which may not be providing income. \To overcome this problem, The National Housing Bank,
apex body on housing finance in India, came out with its guidelines on reverse mortgage in early 2007.
Some of the public sector banks and one private housing finance company have already come up with
their products and the market in India started growing
The society in India has under-gone huge changes in last 4-5 decades. Nuclear family has replaced the
joint family system. The system of family supporting the older people has gone. As mentioned earlier the
public pension system has not been able to provide an alternate support to old people. This condition
leaves the older people in jeopardy. They face following issues
Outliving their retirement income
Depending on their children to help pay expenses
Getting sick and having no way to pay the expenses
Not being able to guarantee an income for their spouse after they are gone
Being able to live as long as they like in their own home
Looking at the current situation, the needs for a product which can help these people to solve
some of these problems is always a welcome step. Reverse mortgage or equity release products
tries to answer all these problems. Every Indian, irrespective of its income level tries to build a
home for himself during his working life. Reverse mortgage will give him/her an opportunity to
generate income from that very home. As the ownership remains with the borrower, he can
transfer the home to his successors also if the later agrees to pay the loan amount. Such a product
relieves the pressure on government also to provide old age security and thus government also
needs to support such initiative.
Many economies have been benefited from this arrangement and the market for such products has
increase quite a lot in these markets. Two such examples are the UK and the USA market.
REVERSE MORTGAGE: A FAILURE IN INDIA?
The finance minister's budget proposals last year included the introduction of the reverse mortgage
facility for senior citizens in India.
Recent reports seem to indicate that less than 150 people have taken advantage of the facility since its
inception, and it is, therefore, likely to be considered a failure. This is unfortunate because the facility
simply has not been adequately explained. It was also unattractively packaged.
The reverse mortgage facility allows senior citizens to unlock the value of their most valuable asset, their
home, by mortgaging it and enjoying the use of the money in their lifetime while continuing to live in it
until their deaths.
It is a well-entrenched idea in many developed countries in the West where its terms are such that only
home-owners above a given age (typically 60-65 years) may apply.
The bank makes an evaluation of the current value of the home, decides the likely lifespan of the
applicant home-owner (and his/her spouse), and, decides what percentage of the current value they are
willing to loan them. The bank also fixes the interest rate it wishes to apply.
Typically, the loan amount seldom is lower than 60-70 per cent of the market value of the property. The
applicants have the option of taking the loan principal in a single lump-sum amount or by a fixed monthly
amount instead.
From time to time, the value of the property is re-visited by both parties. If the valuation has increased,
the applicants are given the option of increasing the quantum of the loan, and should they do so, are given
the incremental amount in lump-sum.
If they have opted for the monthly payment scheme, this amount is appropriately increased. The principal
plus interest charges accrue at the bank while the applicants live on in the home for the lengths of their
lives - or until they decide to sell the home, whichever comes earlier.
If they choose to sell it, they have to pay the bank all the accrued amounts. On the death of the second of
the two spouses, the heirs to the property decide either to redeem the loan and keep the property, or sell
the property and take the residual amount that may accrue from the sale after settling with the bank.
Should the sale proceeds be lower than the accrued principal plus interest amount, the bank takes the loss.
(This could happen if the real estate market has not moved up in the manner the bank had estimated
originally. However experience of the past indicates that the banks seldom lose, as they factor this
likelihood in setting the percentage of the current value they loan the applicants.)
The Indian banking industry must not complicate the scheme as it has done. The industry's offer caps the
available loan amount at Rs 50 lakh, instead of providing for an equitable percentage of the property's
value, and limits the loan period to tenure of 15 years.
Which 60-year-old couple would wish to put themselves in a position to have to redeem the principal plus
interest amount when they are 75 or more, at which age they are unlikely to have the stamina to sell out
and move to a new home, which would inevitably be their only option? Inadequate clarity and
inappropriate terms have led the reverse mortgage loan facility in India to have limited takers.
It is possible that most Indians will not sell the family home, and would prefer passing it on to the next
generation, even if they have to live in relative penury during their waning years because of the small
income. However, many Indian traditions and values have changed in the last 15 years. This is like many
other things.
For example, we hated debt and dreaded living on borrowed funds. The Diners Club credit card was
introduced in India in the 1960s. It never ever took off. But today's new generation has upturned that.
More credit cards are issued in India per month than in most countries in the world, and cards have
changed the way life is lived. The increasing GNP and the surge of the manufacturing and service sectors
owe much to the great surge in consumer purchasing, including of expensive aspirational goods and real
estate.
The urge for a better life NOW is almost fundamental to the way the younger generation perceives its
goals.
Another example has to do with the tradition that parents moved in with one or the other of their children
when they grew old. That too is changing.
Work opportunities are moving young people away to new cities, even new countries, where their parents
cannot or will not follow them. And even in the same cities, many "modern" parents prefer to live on their
own.
Further, in many cases, the children do not want to inherit the parents' home. Should they do so, they sell
it anyway because they have moved on to bigger and better things. There are also old folk without
children, and old folk out of luck with their children. In both cases, they are short of the cash to even pay
essential bills.
So while the reverse mortgage idea may not take off in India as it has in the West, where social and
parent-child behavior usually dictates that the old folk live off their very last penny before they die, there
are sufficient demographic and psychographic data to indicate that in India there are takers in the millions
who, for one reason or another, are likely candidates for the reverse mortgage idea.
In any event, the proposal should be given the opportunity to fail for the right reasons. And that means it
should be packaged and marketed in a way that makes sense to the likely customer.
REVERSE MORTGAGE IN AMERICA AND AUSTRALIA:-
'Reverse Mortgage' scheme has been in existence in the Western countries and particularly famous &
quite successful in United States of America. It can be gain said that, this concept has been taken from
America and is being customized to suit Indian needs. In US, National Reverse Mortgage Lenders
Association (NRMLA) was established in 1997. NRMLA is the national voice for lenders and investors
engaged in the reverse mortgage business. NRMLA fulfills several roles, which include educating
consumers about the opportunity to utilize reverse mortgages, training lenders to be sensitive to the needs
of older Americans, developing Best Practices and enforcing a Code of Conduct to make sure lenders
participating in the program treat seniors respectfully, and promoting reverse mortgages in the media.
However, since there are already established social security benefits for the US citizens, the proportion of
reverse mortgage loans in the US is relatively very less compared to the overall population.
In Australia, reverse mortgages were tried in the 1990s but the concept was withdrawn due to a lack of
consumer demand. But now the reverse mortgage market in Australia is more than $1.1 billion at 30 June
2006.
REVERSE MORTGAGE LOAN:- "PNB
BAGHBAN" FOR SENIOR CITIZENS
PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based product
for senior citizen titled "PNB Baghban". The product addresses one of the very important
requirements of the society in the fast changing culture of Indian society. The salient features of
the product are given here under:
Objective
To address the financial needs of senior citizens owning self occupied property (house), for leading
a decent life.
Eligibility
The residential house/flat owner, who is resident of India, of the age of 60 years & above, is
eligible to raise the loan under this Scheme.
Rate of interest
The loan shall be extended as regular fixed monthly payments during the loan period. i.e. 10-20
years or till the death of the last surviving spouse, whichever is earlier. Depending on the age of
the beneficiary, a chart containing the amount of monthly instalments (calculated on "Reverse
Annuity” basis) to be paid to the senior citizen borrower for different tenors of loan per lac of
rupees is as under :-
10 11 12 13 14 15 16 17 18 19 20
Tenor (yrs)
Monthly Installment (Rs.) 475 405 350 300 265 230 200 180 160 140 125
Payment of lump sum amount, with a maximum of Rs.15 lacs, under the scheme can also be
considered selectively on merit, for meeting medical exigencies of senior citizen borrower and
his/her spouse & dependents.
Security
The loan shall be secured by way of equitable Mortgage of self acquired / self occupied Residential
Property in favour of the Bank. The property will be revalued every 5 years and monthly loan
installment will be re-fixed keeping in view revised ROI (after reset) and valuation of property.
Repayment
Settlement of loan, along with accumulated interest, to be met by the proceeds received out of sale
of residential property and any surplus to be paid to heirs. The loan will, as such, become due for
recovery and payable six months after death of the last surviving spouse. However the legal
heirs/legatee of the deceased borrowers will be given first option to settle the loan, along with the
accumulated interest, without sale of the property.
Pre-payment of Loan
The option to pre-pay the loan at any time during the currency of loan or later, is available.
However, in case there is any takeover of loan by other financial institution/ bank, a charge
of 2% on the amount taken over, will be levied.
Upfront Fee
NIL
Right of Rescission
After the loan is sanctioned senior citizen borrower(s) shall be given upto 10 days time to relook
into his requirements and if he so wishes to cancel the transaction for any reason whatsoever.
SBI Reverse Mortgage Loan (RML) –
(1) Objective of the scheme To provide a source of additional income for senior citizens of India who
own self-acquired and self-occupied house property in India.
(2) Eligibility
c. No. of surviving spouses Should not be more than one. Borrowers will have to give an undertaking
on the date of sanction of that they will not remarry during the currency of the loan. If the borrowers
loan choose to remarry, the loan will be foreclosed.
Borrowers will be required to inform the Bank when they cease to use this
residence as their permanent residence.
f. Title of the Property Borrowers should have a clear and transferable title in their names.
Title verification and search report for a period of 30 years will be
required to be obtained from the Bank’s empanelled advocate at
borrowers’ cost.
g. Title of the property and Case– Title in single name and loan availed jointly with spouse.
number of borrowers.
Title holder should make a Will in favour of the other spouse. The Will
should confirm that this is the last Will and that it supercedes all earlier
Wills, if any. The borrower to undertake that no fresh Will shall be made
during the currency of the loan.
i. Residual Life of property Should be at least 20 years in case of single borrower and 25 years in case
of spouse being below 60 years of age.
(3) Security The RML shall be secured by way of equitable mortgage of residential
property.
(5) Disbursement By credit to an SB account in the joint names of the borrowers operated by
E or S.
2.Lumpsum payment
(7) Quantum of loan The loan amount would be 90% of the value of property. Loan amount
would include interest till maturity. The loan installments payable to the
borrower(s) would be as under for a loan amount of Rs.1 lac (at interest rate
of 10.75% p.a.):
Tenor:15 years
(8) Purpose of Loan Supplementing income, any personal expenses, house repairs, etc. Loan
amount should not be used for speculative, trading and business purposes.
(9) Repayment/Settlement The loan shall become due and payable only when the last
surviving borrower dies or opts to sell the home, or permanently
moves out of the home for to an institution or to relatives.
Typically, a "permanent move" may generally mean that neither
the borrower nor any other co-borrower has lived in the house
continuously for one year or do not intend to live continuously.
Bank may obtain such documentary evidence as may be deemed
appropriate for the purpose.
Settlement of loan along with accumulated interest is to be met by
the proceeds received out of sale of residential property or
prepayment by borrowers and his next of kin.
The borrower(s) or his/her/their legal heirs / estate shall be
provided with the first right to settle the loan along with
accumulated interest, without sale of property.
A reasonable amount of time, say up to 6 months, may be
provided when RML repayment is triggered, for house to be sold.
The balance surplus (if any), remaining after settlement of the loan
with accrued interest and expenses, shall be passed on to the
borrower or the estate of the borrower/legal heirs.
Borrowers will be required to submit annual life certificates in the
month of November every year. This certificate will also include
clauses regarding marital status, and permanent residence of the
borrowers, in addition to the balance confirmation as on
31stOctober of that year.
List of legal heirs will be obtained at the time of sanction of loan.
With a view to avoiding disputes at the time of settlement of loan
amount by legal heirs, specific instructions about inheritance of
the property and payment of balance amount, if any, of the sale
proceeds after settling the Bank’s dues , will be required to be part
of the borrowers’ Will.
(10) Foreclosure The loan shall be liable for foreclosure due to occurrence of the following
events of default.
(11) Pre-payment of loan The borrower(s) will have option to prepay the loan at any time
during the loan tenor.
There will be no prepayment penalty.
(12) Valuation/Revaluation of After the initial valuation to determine the loan amount,
property and option for the subsequent revaluations will be done at intervals of 5 years.
Bank to adjust payments. The Bank shall have the option to revise the periodic/lump-sum
amount every 5 years along with revaluation. In the scenario of
fall in property prices, the Bank may decide to revise the amount
at any time earlier than 5 years. At every stage of revision, it
should be ensured that the Loan to Value ratio does not exceed
90% at maturity.
If the Borrower does not accept the revised terms, no further
payments will be effected by the Bank. Interest at the rate agreed
before the review will continue to accrue on the outstanding
amount of the loan. The accumulated principal and interest shall
become due and payable as mentioned in clauses 9 and 10.
(15) Right of Rescission As a customer-friendly gesture and in keeping with international best
practices, after the documents have been executed and loan transaction
finalized, borrowers will have right of rescission up to seven days to cancel
the transaction. If the loan amount has been disbursed, the entire loan
amount will need to be repaid by the borrower within this period. However,
interest for the period may be waived. Processing fee shall not be refunded
in such cases.
(16) Insurance and maintenance The house property will be insured by the borrower at his cost
of house property against fire, earthquake and other calamities.
The borrower shall ensure to pay all taxes, charges etc.
Bank reserves the right to pay insurance premium, taxes, charges
etc. by reducing the loan amount to that extent.
The borrower shall maintain the property in good condition.
a. Type of facility Non-renewable Overdraft without ledger folio charges. No cheque book /
debit card will be linked to this account.
DHFL pays you a fixed sum of money every month (or every quarter, as per your need)
This amount supplements your pension income and help you to lead a comfortable life without depending on
anyone
Stay independent
Stay in your own Home
Pay no monthly mortgage
Enjoy freedom & flexibility
CODE OF CONDUCT:-
DHFL is mindful that the soundness, usefulness, prosperity, and future of our industry depends upon the honor and
integrity of all persons engaged in the business. Each employee of this organization agrees to observe and maintain
the following standards of conduct in dealing with the senior community and their families: