REVERSE MORTGAGEBY

PUBLICSECTOR BANKS

Regulator

National Housing Bank, or NHB, the regulator for home finance institutions, piloted the scheme.

Definition Of Reverse Mortgage

Reverse mortgage is a home loan product designed for the senior citizens by converting their fixed asset - their home or in banking terms their equity in any house property into an income channel without having to liquidify your equity in case of any requirement.

Short HistoryBirth:The reverse mortgage came into existence in the UK during the crash of 1929.

The scheme is formulated to benefit the senior citizens the most.

Although applicable for the younger people also, 'reverse mortgage loan products for senior citizens' is the basic that every bank of financial institution follows.

In India:Introduced by NHB in 2007. As on March 31, 2010 around 7,000 RMLs of Rs 1,400 crore have been sanctioned. .

More Information

The Dealing Parties: The borrower - the senior citizen The lender - any bank or housing finance institution.

Security for the Lender:The borrower pledge their home property to a lender

Payment of the Loan to the Borrower: In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower (senior citizen) as per needs and not for speculative purposes.

Special feature

Senior Citizen need not make any repayment as long as he or she lives in the house. The loan becomes due and payable only on death of the senior citizen owner or the owner moving out of the home permanently.

The loan dues Settled by way of sale of the house property. However, the heirs are given the first offer to repay the dues, without bringing the property to sale.

Statistics

number of senior citizens is set to rise up to 140 million by 2016 in India

Baroda Ashray

Reverse Mortgage Loan

Purpose

For supplementing the cash flow stream of senior citizens in order to address their financial needs

Bank of Baroda

  Extensive network of 3262 branches 

Operations: 24/7

Spread: 26 countries,

Out of the 3262 branches Baroda Ashray is available only in

214 branches.

Eligibility

Should be Senior Citizen of India, above 60 years of age.

Married couple will be eligible as joint borrowers provided one of them is above 60 years of age and age of spouse is not

below 55 years at the time of application.

Should be the owner of a house or flat located in India in his/her own name.

Fully self occupied property.

The Commercial property will not be taken as a security under the product.

Options The maximum loan is up to 60 per cent of the value of the

residential property.

The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).

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.

Payment

Maximum Amount:

Loan amount inclusive of interest for entire tenure of the loan shall be restricted to Rs. 1 crore, subject to value of the property.

While the upper limit of the loan amount is Rs 1 crore, the maximum amount that a borrower can get after accounting for interest rates is only Rs 40 lakh. 

Example

60-year-old retired individual opts for SBI’s reverse mortgage plan on his house which is valued at Rs 1 crore.

The maximum loan amount sanctioned will be Rs 90 lakh on a reverse mortgage tenure of 15 years with an indicated interest rate of 10.75 per cent a year, the applicant will get Rs 20250 a month. 

But if the amount borrowed was Rs 90 lakh for 15 years at the same rate of interest you would have to pay Rs 1,00,880 a month to the bank.

Apparently, reverse mortgage earns much less.

On the other hand, if the person was to sell his house have earned more but then would have to pay rent too. 

Repayment of Loan

Becomes due and payable when:

• The last surviving borrower dies or

• Would like to sell the home or

• The borrower(s) or his/her/their estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.

• The loan will, as such, become due for recovery and payable. Settlement of loan, along with accumulated interest, to be met by the proceeds received out of sale of residential property.

• Permanently moves out of the home for aged care to an institution or

• A reasonable period of 2 months may be provided when repayment is triggered, for house to be sold.

Rate of interest

Available at Fixed Rate Option (Subject to re-set clause after every 5 years) or at Floating Rate Option.

Fixed Rate Option: Not Available

Floating Rate Option 1.75% Above Base Rate i.e. 10.75% p.a

Few More Details

Security:

Simple / Equitable mortgage of the Residential property.

Tenure:

15 years. The tenure may further be extended till survival of the borrower/s subject to advance value of the property.

Insurance:

Insurance of the residential property mortgaged to the bank shall be regularly taken. The premium charges are to be borne by borrower.

What happens

Home Value Falling ShortIn case the accumulated interest and loan amount is larger than the value of the mortgaged property, the mortgage loan is capped at the value of the home equity only and the lender is the party at loss.

Home Value in ExcessAny excess amount by the sale of the property is duly remitted to the borrower incase of permanent leaving of the house or his heirs in case of the death of the borrower.

Freeing the property from reverse mortgageIn case the senior citizen gets an additional income enough to repay the loan, the property can be released mid term and can also apply for re-reverse mortgage if required on the same property.

What has happened

Number of loans: Approx. 150

Estimated amount: About 80 million,

Announcement in Union Budget a year ago by P. Chidambaram:Said that reverse mortgage essentially is a loan against a home that a senior citizen in India would not have to pay back for as long as she lives in that house.

What Experts and analysts say:“The scheme has failed because of confusion relating to tax treatment”.

Step 1The house is pledged for the ‘reverse mortgage’,

Step 2The bank will arrive at the value of the house after carrying out its due diligence.

Step 3After creating the room for interest costs and price fluctuations, the bank will disburse the balance amount depending on the payment option that is chosen. With every payment that the bank gives, the equity in the house decreases.

Why is this scheme not popular?

FirstLack of proper packaging and information dissemination to the target group.

SecondThe Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property’s value,

ThirdLimit of the loan period to a tenure of 15 years.

Reason for Failure

Tax planners Argue that it is not yet clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan.

The banks Not sure how they should account for the accrued interest while giving out these loans. They believe that there is a need for a complementary insurance product that will cover the borrower if they outlive the tenure of the loan.“Insurance companies have been sensitized to the product as well, but none of them have come out with a product yet,” says an official of the Punjab National Bank, who was the first to offer a scheme, called PNB Baghban, in April 2007, has sold around 100 such mortgages.

Risks to the Bank

•Property price fluctuations

•Interest Rate Risks

•Inflation risks

•Legal risks

Risk to the Borrower

The scheme has a plethora of Disclaimers and Fine Prints, which if not read attentively, pose a risk to the borrower i.e. Senior Citizen

Reverse Mortgage Loan enabled Annuity product (RMLeA) Engineered to convert the "illiquid" house asset of the senior citizen into a stream of fund inflows throughout his/her life time, while allowing the individual to stay in the house.

Special feature of the product Senior need not make any repayment as long as he or she lives in the house. The loan becomes due and payable only on death of the senior citizen owner or the owner moving out of the home permanently.

The loan dues are settled by way of sale of the house property. However, the heirs are given the first offer to repay the dues, without bringing the property to sale.