1 Chapter - I
INTRODUCTION
A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan. Often, the lender will require that there can be no other liens against the home. Any existing liens must be paid off with the proceeds of the reverse mortgage. Invest opedia explains Reverse Mortgage as, a reverse mortgage provides income that people can tap into for their retirement. The advantage of a reverse mortgage is that the borrower's credits not relevant, and is often unchecked, because the borrower does not need to make any payments. Because the home serves as collateral, it must be sold in order to repay the mortgage when the borrower dies (in some cases, the heirs have the option of repaying the mortgage without selling the home). These types of mortgages have large origination costs relative to other types of mortgages. These costs become part of the initial loan balance and accrue interest. Senior citizen borrowers with good credit should carefully analyze the options of a more traditional mortgage, such as a home equity loan, against are verse mortgage.
Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities compound the problem significantly. No regular incomes, a dwindling capacity to work and earn livelihood at this stage can make life miserable. A constant flow of income, without any work would be an ideal solution, which can put an end to all such sufferings. In other
2 words, old age comes with its own share of problems. As a person grows older, and his regular source of income dries up, his dependency on others can increase significantly. With health care expenses on the rise and little social security, living the golden years respectfully can be quite a challenge for senior citizens. In such a scenario, a regular income stream that can help them meet their financial needs and maintain their current living standards becomes important
One typical feature with most senior citizens is that their residential property accounts for a significant portion of their total asset pie. And, given its illiquid nature, property fails to aid senior citizens on the liquidity front.
In the Union Budget 2007-08, a proposal to introduce „Reverse Mortgages‟ was put forth. Understanding Reverse Mortgage requires the knowledge of meaning of regular mortgage.
In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (Equated Monthly Installments),which comprise of both principal and interest amounts. The property is utilized as a security to cover the risk of default on the borrower‟s part.
The concept of Reverse Mortgage is very simple as shown below, where any senior citizen who owns a house can go to a bank. The person can avail the reverse mortgage loan from the bank by mortgaging the house to the bank. This loan ensures that the senior citizens can get a decent monthly income(based on the valuation of the house) till the senior citizen is alive and can stay in the house as well. It helps the “house-rich-but-cash-poor” people.
3 The whole idea is to ensure a financial monthly cash flow to allow senior citizens to live freely and independently. Upon the death of the person, the bank may return the house to legal heirs if the loan is paid back or else the house is sold and loan recovered, with the remaining amount paid back to legal heirs.
The concept is simple and on the paper it sounds to be a super-hit with the ever increasing population above 65 years in India, especially with the family support system breaking very fast. In my apartment complex itself, I have seen hundreds of old age people, who are staying alone with their kids settled out of country. But to the surprise of financial institutions, the scheme has seen a very damp response in India.
Reverse Mortgage is a Home Loan product designed for the senior citizens by converting their fixed assets- their home or in banking terms, their equity in any house property into an income channel without having to liquidity your equity in case of any requirement. In other words, in the Reverse Mortgage, senior citizens (borrowers) who own a house property, but do not have a regular income, can mortgage the same with the lender (a scheduled bank or a housing finance
company-4 HFC). In return, the lender makes periodic payment to the borrowers during their lifetime. In spite of mortgaging the house property, the borrower can continue to receive regular flows of income from the lender as well. Also, since the borrower doesn‟t have to service the loan, he need not bothered about repaying the „borrowed amount‟ to the lender.
Reverse Mortgage in India
Reverse Mortgage in India is still at an infancy stage. The Reverse Mortgage came into existence in the UK during the crash of 1929. Having evolved genetically from the developed countries and mainly USA, Reverse Mortgage is a scheme formulated to benefit the senior citizens the most. Recently, National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), released draft norms of reverse mortgage(the final guidelines are awaited). Following are some of the key features of the scheme from the draft norms:
1) Reverse Mortgage loans (RMLs)are to be extended by Primary Lending Institutions(PLIs) viz. Scheduled Bank and Housing Finance Companies (HFCs) registered with NHB.
The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective borrowers are advised to consult PLIs regarding the detailed terms of RML as applicable to them.
2) Eligible Borrowers:
i. Should be Senior Citizen of India above 60 years of age.
ii. Married Couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the
5 PLI, subject to at least one of them being above 60 years of age. PLIs may Putin place suitable safeguards keeping into view the inherent longevity risk. iii. Should be the owner of a self-acquired, self-occupied residential property(house or flat) located in India, with clear title indicating the prospective borrower‟s ownership of the property.
iv. The residential property should be free from any encumbrances. v. The residual life of the property should be at least 20 years.
vi. The prospective borrowers should use that residential property as permanent primary residence. For the purpose of determining that the residential property‟s the permanent residence of the borrower, the PLIs may rely on documentary evidence, other sources supplemented by physical inspections
3) Determination of Eligible Amount of Loan:
i. The amount of loan will depend on market value of residential property, as assessed by the PLI, age of borrower(s), and prevalent interest rate.
ii. The table given hereunder may serve as an indicative guide for determining loan eligibility A g e ( y r s ) L o a n a s p r o p o r t i o n o f A s s e s s e d V a l u e o f Pro perty (%) 60-65 40 66-70 50 71-75 55 Above 75 60
6 The above table is indicative and the PLIs will have the discretion to determine the eligible quantum of loan reckoning the „no negative equity guarantee‟ being provided by the PLI. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower:-
The PLI may consider ensuring that the equity of the borrower in the residential property (Equity to Value Ratio-EVR) does not at any time during the tenor of the loan fall below 10%.
a. The PLIs will need to revalue the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state, etc. Such revaluation may be done at least once every five years; the quantum of loan may undergo revisions based on such re-valuation of property at the discretion of the lender.
(4)Nature of Payment:
Any or a combination of the following:
a. Periodic Payments (monthly, quarterly, half-yearly, annual) to be decided mutually between the PLI and the borrower upfront.
b. Lump-sum payments in one or more trenches.
c. Committed Line of Credit, with an availability period agreed upon mutually, to be drawn down by the borrower. Lump-sum payments may be made conditional and limited to special requirements such as medical exigencies, home improvement, maintenance, up-gradation, renovation, extension of residential property etc. The PLIs may be selective in considering lump-sum payment option and may frame their internal policy guidelines, particularly the
7 eligibility and end-use criteria. However, these conditions shall be fully disclosed to potential borrowers upfront. It is important that nature of payments be decided in advance as part of the RML Covenants. PLI at their discretion may consider providing for options to the borrower to change. (5)Eligible End use of funds:
The loan amount can be used for the following purposes: Up-gradation, renovation and extension of residential property.
a. For uses associated with home improvement, maintenance/insurance of residential property.
b. Medical, emergency expenditure for maintenance of family. c. For supplementing pension/other income.
d. Repayment of an existing loan taken for the residential property to be mortgaged.
e. Meeting any other genuine need. Use of RML for speculative, trading and business purposes shall not be permitted.
(6)Period of Loan: Maximum 15 years. (7)Interest Rate:
The interest rate (including the periodic rest) to be charged on the RML to be extended to the borrower may be fixed by PLI in the usual manner on risk perception, the loan pricing policy etc. and specified to the prospective borrower. Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms and conditions in a transparent manner, upfront to the borrower.
8 (8)Security:
a. The RML shall be secured by way of mortgage of residential property, in a suitable form, in favor of PLI.
b. Commercial property will not be eligible for RML. (9)Valuation of Residential Property:
a. The Residential property should comply with the local residential land-use and building bye laws stipulated by local authorities, with duly approved lay-out and building plans.
b. The PLI shall determine the Market Value of residential property through their external approved valuer(s). In-house professional values may also be used subject to adequate disclosure of the methodology.
c. The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLI, which in any case shall be at least once every five years. The methodology of the revaluation process and the frequency/schedule of such revaluations shall be clearly specified to the borrowers upfront.
d. PLIs are advised not to reckon expected future increase in property value in determining the amount of RML. Should the PLIs do so in their best commercial judgment, they may do so under a well defined policy approved by their Board and based on professional advice regarding property prices. (10)Provision for Right to Rescission:
As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, Senior Citizen borrowers may be given up to three business days to cancel the transaction, the “Right of Rescission”. If the loan amount has been
9 disbursed, the entire loan amount will need to be repaid by the Senior Citizen borrower within this three day period. However, interest for the period may be waived at the discretion of the PLI.
(11)Loan Disbursement by Lender to borrower:
a. The PLI will pay all loan proceeds directly to the borrower, except in cases pertaining to retirement of existing debt, payments to contractor(s) for the repairs of borrower‟s property, or payment of property taxes or hazard insurance premiums from the borrower‟s account set aside for the purpose. b. In case the residential property is already mortgaged to any other institution, the PLI may, at its discretion, consider permitting use of part proceeds of RML prepay/repay the existing housing loan. The loan amount will be paid directly to that institution to the extent of the loan outstanding with that institution with a view to release the mortgage.
c. Periodicity:
The loan will be extended as regular monthly, quarterly, half-yearly or annual periodic cash advances or as a line of credit to be drawn down in time of need or in lump-sum.
d. The PLI will have the discretion to decide the mode of payment of the loan including fixation of loan tenor, depending on the state and market value of the property, age of the borrower and other factors. The rationale behind the decision of mode of payment and fixation of the loan tenor shall be clearly disclosed to the borrowers.
10 (12)Closing:
The PLIs will provide in writing, a fair and complete package of reverse mortgage loan material and specimen documents, covering inter-alia, the benefits and obligations of the product.
They may also consider making available a tool kit to illustrate the potential effect of future house values, interest rates and the capitalization of interest of the loan. The closing costs may include the customary and reasonable fees and charges that may be collected by the PLIs from the borrower. The cost for any item charged to the borrower shall not normally exceed the cost paid by the lender or charged to the lender by the provider of such services(s). Such items may include:
a. Origination, Appraisal, and Inspection Fees. The borrower may be charged pro-rata origination, appraisal and inspection fees by the PLI/appraiser.
b. Verification Charges of external firms c. Title Examination Fees
d. Legal Charges/Fees
e. Stamp Duty and Registration Charges
f. Property Survey and Valuation Charges A detailed schedule of all such costs will clearly be specified and provided to the prospective borrowers upfront by the PLIs
(13)Settlement of Loan:
a. The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or relatives. Typically, a “permanent move” may generally mean that neither the borrower nor any other
co-11 borrower has lived in the house continuously for one year or do not intend to live continuously. PLIs may obtain such documentary evidence as may be deemed appropriate for the purpose.
b. Settlement of Loan along with accumulated interest is to be met by the proceeds received out of sale of Residential Property.
c. 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. d. A reasonable amount of time, say up to 2 months may be provided when RML repayment is triggered, for house to be sold.
e. The balance surplus (if any) remaining after settlement of the loan with accrued interest, shall be passed on to the estate of the borrower.
(14)Prepayment of Loan by the Borrower(s):
a. The borrower(s) will have option to prepay the loan at any time during the loan tenure.
b. There will not be any prepayment levy/penalty/charge for such prepayments.
(15)Loan Covenants:
a. The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanent primary residence.
b. Non-Recourse Guarantee:
The PLIs shall ensure that all reverse mortgage loan products carry a clear and transparent „no negative equity‟ or „non-recourse‟ guarantee. That is, the borrower(will) never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.
12 c. Loan Agreement :
The PLIs shall enter into a detailed loan agreement setting outtherein the salient features of the loan mortgage security terms and other termsand conditions, including disbursement or repayment of loan, in addition to the usual provisions, which are ordinarily incorporated in a mortgage loan document.
d. In addition, the PLI may also consider obtaining a Registered Bill from the borrower stating, inter-alia, that he/she has availed of RML from the PLI on security by way of mortgage of the residential property in favour of the PLI, meaning thereby that in the event of death of the borrower (co-borrower, if any),the mortgage is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s). e. The PLIs may consider taking an undertaking from the prospective borrower that the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at the time of a ailment of RML facility as per the property will vest in his/her demise. The borrower will also undertake not to make any other “Will” during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the PLI‟s favor by way of creation of mortgage on the immoveable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower‟s death.
f. The PLI will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities.
13 g. The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges and statutory payments.
h. The PLI may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures.
(16) Title Indemnity/Insurance:
a. The PLI shall obtain legal opinion for ensuring clarity on the title of the residential property.
b. The PLI shall also endeavor to obtain indemnity on title related risks, as and when such indemnity products are available in India.
(17)Foreclosure:
a. The loan shall be liable for disclosure due to occurrence of the following events of default:
the borrower has not stayed in the property for a continuous period of one year.
pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.
borrower(s) declare himself/herself/themselves bankrupt.
ty so mortgaged to the PLI is donated or abandoned by the borrower(s).
the security of the loan for the lender. For example: renting out part or all of the
14 house; adding a new owner to the house‟s title; changing the house‟s zoning classification; or creating further encumbrance on the property either by way of taking out new debt against the residential property or alienating the interest by way of a gift or will.
perpetration of fraud or misrepresentation by the borrower(s).
residential property for public use.
for health or safety reasons).
(18)Option for PLI to Adjust Payments:
a. The PLI shall have the option to revise the periodic/lump-sum amount at such frequency or intervals based on revaluation property, which in any case shall beat least once every five years.
b. Borrower shall be provided with an option to accept such revised terms and conditions for furtherance of the loan.
c. If the borrower does not accept the revised terms, no further payments will will be effected by the Lender. 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 (13)& (17).
(19)Counseling and Information to Borrowers:
a. The PLI will observe and maintain high standards of conduct in dealing with the Senior Citizens and their families and treat them with special care b. The PLI shall clearly and accurately disclose the terms of the RML without any ambiguity.
15 c. The PLI should clearly explain to the prospective borrowers the terms and conditions of RML, the methodology followed for revaluation of the residential property, the method of determination of eligible quantum of loan, the frequency of re-valuation and review of terms and all related aspects of the RML.
d. The PLI may suggest to the Senior Citizens to nominate their “personal representatives” usually a close relative who the PLI can contact in the event of any potentialities.
e. The PLIs may counsel the prospective borrowers about the possible impacts to the borrowers due to adverse movements in interest rates and property price fluctuations.
f. The PLI shall clearly specify all the costs to the Borrower(s) that are associated with the transaction.
g. The PLI shall in no way assert or imply to the borrower(s) or that the borrower(s) is/are obligated to purchase any other product or service offered by the PLI or any other associated institution in order to obtain a reverse mortgage loan.
h. Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reverse mortgage transaction.
i. Overall, the PLI shall treat the Senior Citizen Borrower fairly.
16 In case of reverse mortgage, there exists a few guideline, which may not „appeal‟ to the house property owner i.e. the borrower:
(1) As per the guidelines, the maximum loan tenure can be 15 years. So, if the borrower outlives the loan tenure, he can continue to stay in the house. However, he will no longer be eligible for any payments from the bank/HFC.
(2) The Bank/HFC shall have the option to revise the periodic/lump-sum amount at such frequency or intervals based on revaluation of property, or at least once
every five years. The borrower will be provided the option to accept the revised terms and conditions to continue the loan. However, if he refuses to accept the revised terms and conditions, no further payments shall be made by the bank/HFC. Interest at the rate agreed before the review will continue to accrue on the outstanding loan amount.
(3) Since the reverse mortgage can be either at floating or fixed rate, it will be prone to the interest rate movements. Hence, in the scenario when interest rates are moving northwards, a floating rate reverse mortgage would add to the borrower‟ sliability.
(4) Under the reverse mortgage, the legal heirs of the owner are not entitled to take control over the mortgaged property up to the extent of the outstanding loan. They are required to first repay the outstanding loan amount along with the interest to stake a claim on the property.
(5) The banks/HFC at their discretion may levy penalty or other charges on the prepayment of loan. So, if the borrower or his heirs wish to prepay the loan amount, they may have to bear an additional cost. The most important
17 advantage offered by the reverse mortgage scheme is that despite mortgaging the house, the house owner retains its ownership, is entitled to live in the same throughout his lifetime and also has access to a regular income stream, which can help meet his day-to-day needs. From the Banks/HFC‟s perspective, the mortgage on the property in its favors ensures that there is no scope for default. Having said that, individuals who wish to opt for the reverse mortgage scheme would do well to acquaint themselves with the nitty-gritty‟s of the guidelines. Also, the final guidelines will aid in providing more clarity to individuals who wish to participate in the reverse mortgage scheme.
•Guidelines for Property Acquisition by Non-Resident Indian (NRI)
Guidelines for property acquisition by an NRI are laid down by FEMA
Regulations, notified vide RBI Notification No. FEMA 21/2000-RB. NRIs and PIOs can acquire immovable property in India in the following ways:
1.By way of Purchase:
An NRI/PIO can acquire a residential or commercial property by purchasing it under the general permission granted by the RBI. Payment for purchasing the property should be made only out of funds remitted to India through normal banking channels or funds held in NRE/ FCNR/NRO accounts maintained in India. No payment can be made outside India. A declaration is required to be submitted to Reserve Bank of India (Central Office) about the real estate acquisition of property by an NRI in form IPI 7 within a period of 90 days from the acquisition/final payment of purchase consideration, along with a certified copy of the document as evidence of the transaction and Bank certificate stating the amount paid.
18 2. By way of Gift:
An NRI/PIO can acquire immovable property (only residential/commercial property) by way of gift from a resident of India, an NRI or a PIO. Agricultural land/plantation property/farm house in India cannot be acquired by way of gift. A foreign national of non-Indian origin resident outside India cannot acquire any immovable property in India by way of gift.
3. By way of Inheritance:
NRIs/PIOs/ foreign nationals of non-Indian origin are eligible to hold immovable property acquired by way of inheritance from a resident Indian / NRI or PIO. However, they would need specific approval from the RBI to hold any immovable property in India if acquired from a person resident outside India. It is mandatory that the person from whom the property is inherited should have acquired the same in accordance with the foreign exchange regulations applicable at the time of acquisition. Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan are required to seek specific approval of the Reserve Bank of India before being able to inherit any immovable property in India.
ement of Land
property by NRI by Purchase/Gift/Inheritance -in period now for any acquisition of immovable property.
19 residential/commercial property received by way of gift by NRI should be credited to NRO accounts only.
resident Indian not exceeding USD 1million can be remitted abroad in one calendar year.
NRI cannot be repatriated.
gift by NRI/PIO can only be credited to NRO account.
in their resident country. This way, in their absence their relatives can represent them during the proceedings.
•Reverse Mortgage Pros and Cons
The Reverse Mortgage pros and cons should be measured carefully before subscribing to it. Since, the bulk of the savings for the average Indian should be locked away in a house or other property at the time of retirement, and in case of requirement, it cannot been cashed except by selling the loan or moving out. Taking the usual mortgage loans in lieu of your homes 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
20 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.
How Reverse Mortgage Works
Mr Patil has retired after what can be called a very fulfilling career with a leading engineering company. His only daughter is married and well settled in Bangalore. He owns a large house in Thane -- worth about Rs 80 lakh (Rs 8 million), but he has limited savings (including PPF and EPF) of Rs 10 lakh (Rs 1 million) to generate any major income. He is not expecting any pension either. His worry now is to pay for his modest monthly expenses of Rs 20,000. His financial assets can at best generate Rs 10,000 per month for him and the income thus generated will not keep pace with inflation -- meaning that after five years, when he will require Rs 30,000 per month, while his financial assets will still generate only Rs 10,000 per month. The only option he had earlier was to rent his house and move to a smaller house himself or to sell his house altogether and invest the proceeds to earn a higher monthly income. Either way, in his old age, he will be forced to look around for accommodation and keep on worrying about the rising rents -- not a very happy prospect. This is where reverse mortgage can be of great value. Budget 2007amongst other things has given a green signal to the launch of Reverse Mortgage -- a widely used instrument in the developed world by the elderly to derive cash flows from their owned house. The popularity of the instrument lies in that it converts an illiquid asset -- the house -- into liquid cash flows for the owner, typically a senior citizen. A more attractive feature is that senior citizens can continue to live in that house even after drawing cash-flows from it.
21
Chapter - II
Here is how it works
Reverse mortgage as its name indicates operates in a manner opposite to that of the typical mortgage such as a home loan. In a typical mortgage, you borrow money in lump-sum right at the beginning and then pay it back over a period of time. In your payback -- the EMI -- a portion goes towards paying the interest and the remaining goes towards paying back principal. All along, you pledge the asset -- namely the home you have bought with the loan -- to the bank. This asset is the security against which the bank is lending to you. 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. There are various forms of reverse mortgage available in the developed countries. 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, in case of Mr and Mrs Patil, if they were to opt for reverse mortgage for tenure of 15 years, they will get annuity (the reverse EMI) from bank for 15 years. After that, the annuity payments stop. However, they continue to live in the house. Assume that Mr Patil dies after 17 years. Mrs Patil can still live in the house till she is alive. After her death, 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 bank bears the risk that
22 the outstanding will exceed the market value of property then and will not ask for the difference from the heirs. The key question is -- how much of an annuity income can my house generate using reverse mortgage? The banks have so far not indicated which interest rates they will use to determine the EMI -- 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 12-14%.Second important variable is the loan to value ratio. Most loans against property work at60% loan to value ratio -- i.e. by pledging a Rs 1 crore (Rs 10 million) property, you can g e t a R s 6 0 l a k h ( R s 6 m i l l i o n ) l o a n . S o m e b a n k s a r e h o w e v e r d e s i g n i n g r e v e r s e mortgage products with a higher loan to value ratio -- as much as 90% in some cases. The specific annuity paid out also depends on the age of the home owner. Higher the age, higher the annuity everything else being constant. For simplicity consider a 60-year-oldhome owner taking reverse mortgage with loan to value ratio of 80% and an interest rate of 12%.The annuity from reverse mortgage works out to be roughly ~Rs 160 per lakh of property value. Hence for Mr Patil, with a property valued at Rs 80 lakh, the annuity he can expect will be in the range of Rs 12,800 per month. Coupled with his income from financial assets, he can continue to live comfortably with no cutback on lifestyle.
•Different Reverse Mortgage Offerings in India •Offerings by State Bank of India (SBI):
The State Bank of India (SBI) started offering reverse mortgage products for senior citizens on October 12, 2007. Joint loans are given if the spouse is alive and is over 58years of age. The loan is offered by all branches of SBI from October 12, 2007. The loan is offered at an interest rate of 10.75% p.a. and is subject to change at
23 the end of every five years along with revaluation of security. Every five years, bank may even re-adjust the loan instalments, if it is needed, depending on market conditions and loan status. The Chief General Manager for Personal Banking (SBI), Mr. Sangeet Shukla told that there is no upper limit of amount of loan. Also, the maximum period for availing this benefit is 15 years. Under this loan, borrowers can avail payments against the security of their houses on monthly or quarterly installments or either he/she can go for as a lump-sum payment at the beginning. During their lifetime, the borrower does not have to pay the loan and will continue to stay i n t h e i r h o u s e . T h e r e a f t e r , e i t h e r t h e l e g a l h e i r s c a n r e p a y t h e l o a n a n d r e d e e m t h e property but if this option is not exercised, bank will sell the property and liquidate the loan. Surplus, if any, will be passed on to the legal heirs
For a loan of one lakh, the monthly payment to the borrower on a 10 year loan is Rs 468and on a 15 year loan it would be Rs 225. Similarly, for a loan of one lakh, the quarterly payment to the borrower on a 10 year loan is Rs 1,423 and on a 15 year loan it would be Rs 687.
•Reverse Mortgage Loan- “PNB BAGHBAN” for Senior Citizen
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 first changing culture of Indian Society. The salient features of the product are given hereunder:
a. Objective:
To address the financial needs of senior citizens owning self -occupied property (house), for leading a decent life.
24 b. 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.
c. Qualifying/Maximum Amount of Loan/Margin:
The qualifying amount of loan will depend on the realizable value of the residential property, after maintaining margin of 20%. The maximum qualifying amount of loan, along with interest, shall be restricted to Rs.100.
d. Rate of Interest:
10% p.a. (fixed) subject to re-set clause of five years (as applicable for Housing Loan Borrowers).
e. Disbursement/Tenure of Loan:
T h e l o a n s h a l l b e e x t e n d e d a s r e g u l a r f i x e d 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, ac h a r t c o n t a i n i n g t h e a m o u n t o f m o n t h l y i n s t a l l m e n t s ( c a l c u l a t e d o n “ R e v e r s e Annuity Mortgage” basis) to be paid to the senior citizen borrower for different tenures of loan per lakh of rupees is as under:
Tenure (Yrs.) 10 11 12 13 14 15 16 17 18 19 20 Monthly Installment 49 0 42 0 36 0 31 5 27 5 24 0 21 5 19 0 17 0 15 0 135
25
f. Security:
The loan shall be secured by way of Equitable Mortgage of SelfAcquired/S e l f -O c c u p i e d R e s i d e n t i a l P r o p e r t y i n f a v o u r o f t h e B a n k . T h e p r o p e r t y t o b e revalued every 5 years and monthly loan installment to be re-fixed keeping in view applicable ROI and valuation of property.
g. Repayment of Loan:
Settlement of loan, along with accumulated interest, to be met by the proceeds received out of sale residential property and any surplus to be paid to heirs. The loan will, as such, become due for recovery and payable six months after t h e d e a t h o f t h e l a s t s u r v i v i n g s p o u s e . H o w e v e r t h e l e g a l h e i r s / l e g a t e e o f t h e d e c e a s e d b o r r o w e r s w i l l b e g i v e n f i r s t o p t i o n t o s e t t l e t h e l o a n , a l o n g w i t h t h e accumulated interest, without sale of the property.
h. Upfront fee/Documentation Charges:
Upfront Fee –Amount equivalent to half month‟s loan installment subject to Maximum of Rs. 15,000 and Documentation Charges/Inspection Charges-Nil.
i. Right of Recession:
After the loan is sanctioned, the senior citizen borrower(s) shall be given up to 10 days time to re look into his requirements and if he so wishes to cancel the transaction for any reason whatsoever.
26 • Reverse Mortgage Loan by DHFL:
India‟s Second Largest Private Housing Finance Company, Dewan
Housing Finance Corporation Limited (DHFL). is the first off the block in India with are verse mortgage scheme. The Scheme called “Saksham” is targeted at retired senior citizens above 60 years of age. The scheme is similar to a housing loan except that in a home loan
the borrower pays a fixed EMI to the lending institution, while in a reverse mortgage, the lender pays the borrower a fixed sum of money on am o n t h l y / q u a r t e r l y b a s i s , t h e t o t a l p a y m e n t b e i n g e q u a l t o t h e v a l u e o f t h e property and the interest on the loaned amount. After the death of the borrower and the borrower‟s spouse, the housing company sells the property to recover the amount paid out along with interest at a rate similar to interest on housing loans. The Scheme is designed to supplement the monthly income of senior citizens. This scheme is offered to retired people above the age of 60 years who own property and have been living in it for at least one year. The loan amount is sanctioned based on the:
property
The eligibility for a reverse mortgage loan is simple. The borrower should be 60years of age, living in self-owned property, which is free of any encumbrances, and is an approved construction. The amount loaned would depend on the estimated value of the property (minus the interest cost) its condition and life. The loan does not apply to ancestral property. Saksham
27 allows customers and their spouses to live in the property as long as they are alive, without the fear of eviction even after the tenure expires. The surplus amount is then paid to the legal heirs of the borrower. The legal heirs also have the option to repossess the property after the demise of both customers and their spouses. According to Shivkumar Mani, head, marketing, DHFL, “As per the guidelines laid down by NHB, DHFL is the first company to launch this scheme in India. This unique scheme is designed to help senior citizens to sustain their lifestyle and also help them maintain their monthly expenditure without being dependent on anyone. It is a social security scheme designed to benefit the senior citizens postretirement.”DHFL will first launch Saksham in Mumbai and its adjoining areas before making
it available nationally.
•Reverse Mortgage Loan by Bank of Baroda: a. Purpose:
For supplementing the cash flow stream of senior citizens in order to address their financial needs.
b. Eligibility:
is above 60 years of age and age of spouse is not below 55 years at the time of application.
India in his/her own name. Residential property should be used as permanent primary residence (fully self occupied property).
28 The maximum loan amount inclusive of interest for entire tenure of the loan shall be restricted to Rs. 1 crore subject to value of the property.
d. Option to adjust payments:
The Bank shall have the option to revise periodic annuity amount, if lump-sum payment is taken or at the interval of every 5 years based on valuation of the property.
e. Repayment of Loan:
dies or would like to sell the home / permanently moves out of the home for aged care to an institution or relatives. 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.
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 p r o p e r t y . A r e a s o n a b l e p e r i o d o f 2 m o n t h s m a y b e p r o v i d e d w h e n repayment is triggered, for house to be sold.
f. Rate of interest:
Available at Fixed Rate Option (Subject to re-set clause after every 5 years) or at Floating Rate Option.
g. Security:
Simple / Equitable mortgage of the Residential property. h. Tenure:
1 5 y e a r s . T h e t e n u r e m a y f u r t h e r b e e x t e n d e d t i l l s u r v i v a l o f t h e borrower/s subject to advance value of the property.
29 i. Insurance:
Insurance of the residential property mortgaged to the bank shall be regularly taken. The premium charges are to be borne by borrower.
•Risks to Reverse Mortgage Lenders:
Szymanoski is a good starting point to appreciate the risks faced by an RM lender. These risks are at the heart of the reluctance of lenders to get into RM lending, in the absence of public policy support. The principal and unique problem facing the lender is that of predicting accumulated future loan balances under an RM, at the time of origination. The uniqueness is because RM is a “rising debt” instrument. Since RM is a non-recourse loan, the lender has no access to other properties, if any, of the borrower. Even if the collateral property appreciates in value, it might still be lower than the loan balance at the time of disposal of the property. There are three basic sources of this risk:
a. Mortality Risks - This is the risk that an RM borrower lives longer than anticipated. The lender might get hit both ways: he has to make annuity payments for a longer period; and the eventual value realized might decline. However, this risk is usually „diversifiable‟, if the RM lender has the large pool of such borrowers. Possibility of adverse selection( o f p r e d o m i n a n c e o f r e l a t i v e l y h e a l t h i e r b o r r o w e r s ) i s c o u n t e r b a l a n c e d b y t h e possibility that even borrowers with poor health may be attracted by RM‟s credit line or lump sum options. However, there is no literature on one possible source of systematic risk. Since RM is projected to substantially improve the monthly income and/or liquid funds of the RM borrowers, would not result itself in a systematically higher life
30 expectancy amongst them than otherwise. Perhaps this lacuna is due to the relatively short experience with RM so far.
b. Interest Rate Risks - Given that the typical RM borrower is elderly and is looking for predictable sources of income/liquidity, RM loans promise a fixed monthly payment/lump-sum/credit line entitlement. However, for the lender, this is a long-term commitment with significant interest rate risks.
While fixing the above, the lender has to account for a risk premium and thus can offer only a conservative deal to the borrower. This interest rate risk is not fully diversifiable within the RM portfolio. M o s t o f t h e R M l o a n s a c c u m u l a t e i n t e r e s t o n a f l o a t i n g r a t e b a s i s t o m i n i m i z e interest rate risks to the lender. However, since there are no actual periodic interest payments from the borrower, these can be realized only at the time of disposal of the house, if at all.
c. Property Market Risk - This risk may be partly diversifiable by geographical diversification of RM loans. However, property values may be a non-stationary time series. Others have pointed out additional aspects of these risks:
RM can be considered as a package loan with a „crossover‟ put option to the b o r r o w e r t o s e l l h i s h o u s e a t t h e a c c u m u l a t e d v a l u e o f t h e R M l o a n a t t h e (uncertain) time of repayment. If this option can be valued, it can be suitably priced and sold in the market. However, unlike in the case of forward mortgages, markets for resale, securitization and derivatives based on RMs are existent or non-competitive. Small market size and predominance of government backedRM
31 insurance may dissuade potential entrants. The impedes the flow of funds to finance RM loans.
added to the loan balance are taxable as current income even though there is no cashinflow.RM loans found takers amongst lenders only after the availability of default insurance under the HECM programme. Even then, in most of the RM loans, interest accumulates at a floating rate linked to one-year treasury rates.
d. Liquidity Risks: In RM loans where the borrower draws down on his loan through a credit line, there is a risk of sudden withdrawals.
•Tax Treatment of Reverse Mortgage Loan:
The Direct Taxes Codes Bill, 2009 is silent on the tax treatment of Reverse Mortgage. The author opines that having regard to the nature of transactions, the position which prevails under the Income Tax Act, 1961 will continue under the Code also. However, it is desirable that express provisions be incorporated.
the Income Tax Act, 1961 , any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government is not regarded as a „transfer‟. Consequently, the amount received by an individual as a loan, either in lump-sum or in installment, in a transaction of reverse mortgage as above is exempt from tax under Section 10(43) of the Act.
mortgages. As the Code is silent on the reverse mortgage, the question arises what will be its tax implications under the Code?
32 The Reverse Mortgage is so-called because the payment stream is reversed. Instead of the borrower making monthly payments to the lender, as with a regular mortgage,a l e n d e r m a k e s p a y m e n t t o t h e b o r r o w e r . W h i l e a r e v e r s e m o r t g a g e l o a n i s outstanding, the borrower owns the home and holds title to it, without having to make any monthly mortgage payments. T h e r e i s n o t r a n s f e r o f t i t l e i n p r o p e r t y b y t h e b o r r o w e r t o t h e l e n d e r w h e n h e mortgages property to the lender. The borrower remains the owner with right to redeem the property by repayment of dues. He has a right to continue living in the house till death. Non-repayment of amounts received with interest will not invite action from lender. The Explanatory Memorandum to the Finance Bill, 2008 notes that “in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property”. To the same effect paragraph 15.3 of CBDT‟s Circular No.1/2009 dated March 27, 2009.Therefore, amount received on reverse mortgage will not attract capital gains tax in the financial year in which the amount is received. The transfer/alienation of property occurs “at the point of alienation of the mortgaged property by the mortgagee for the purpose of recovering the loan.” Therefore, taxable capital gains will arise in the year in which the mortgaged property is alienated by the mortgagee for recovering the loan.
Having regard to the nature of the transaction, it appears that the above position w h i c h p r e v a i l s u n d e r t h e A c t w i l l c o n t i n u e u n d e r t h e C o d e a l s o . H o w e v e r , i t i s desirable that express provisions be incorporated.
33 the treatment of the same in India is still under consideration along with the concept itself. A l t h o u g h a h a n d f u l o f F i n a n c i a l I n s t i t u t i o n s h a v e i n i t i a t e d t h e f a c i l i t y o f R e v e r s e Mortgage in India, the National Housing Bank is endeavoring towards crystallizing its concept and scheme. Reverse Mortgage was introduced for the first time by the Hon‟ble Finance Minister while presenting Budget for 2007-08. The modalities in relation to taxability of the payments to be received under the Reverse Mortgage are yet to be considered and have to be worked upon. However, the thrust of the considerations and deliberations shall focus on imposing no burden of tax on the borrower(s) as the nature of Reverse Mortgage Loan is on the lines of a welfare loan for the senior citizens. A Reverse Mortgage is an excellent financial planning tool for older homeowners to supplement their retirement income, pay for healthcare costs, make home improvements, buy a second home, and/or establish an emergency fund, while staying in their home. The Reverse Mortgage Loan may be used anyway the borrower(s) wishes as it is his money and his house. So modern wisdom rightfully says, one can have the cake and eat it too.
34 •Reverse Mortgage: A failure in India
Reverse Mortgage is not a very oft heard and used term in India, despite the fact that there are millions of old age people in the country. Just taking a peek at the Age Transition graph for India, it is clear that the population of old age group folks are going to increase many-fold from this year onwards. It is obvious that the entire old population is not going to be financially stable with the rising inflation & increasing health care costs and they would not have much means to earning in old age since the working age population will be growing as well.
35 C h a p t e r - III
C o m p i l a t o n o f d a t a c o l l e c t e d
The data & the whole project has been compiled from some of interesting internet web pages, some of the books of COST AUDIT & OPERATIONAL AUDIT, some of information collected from friends & have been complied by me as on project on reverse mortgage.
36 Chapter - IV
Conclusion
Reverse Mortgage, if available, offers an attractive option to the elderly tofinancet h e i r c o n s u m p t i o n n e e d s o n t h e i r o w n , w i t h o u t t h e n e c e s s i t y o f m o v i n g o u t o r worrying about indebtedness or repayment.
If designed properly and offered by an empathetic lender, RM might turn out to be the vanguard product to build up brand equity for the lender in this niche segment. Demographic projections indicate that this segment is the fastest growing segment all over the world.
R M , i f w i d e l y a v a i l a b l e , m i g h t i n f a c t e n c o u r a g e m o r e p e o p l e i n t h e w o r k i n g population to increase the proportion of their savings invested in housing.
is likely to attract increasingly favorable public policy attention, given the projected importance of this segment in the electoral politics of all democratic countries.
market is nowhere near its estimated potential for a variety of reasons from the demand, supply and regulatory considerations.
the Indian market must proceed with caution. pilot RM product seem to be the following: (a). Assessment of potential demand in a limited geographical area through (i). A scientific market survey amongst the specified target segment. (ii). Qualitative research to explore borrower concerns and expectations. (b). Precise assessment of legal, taxation and regulatory issues related to RM. (c). Exploratory financial modeling to assess lender risk and option for managing it.
37 •Suggestions
the facility of Reverse Mortgage workable: End Use of loan should be monitored. An explicitly allowed under „income from House Property‟ to give tax advantage to the borrower.
small part of the loan amount may be parked in unit linked insurance schemes so that the premium paid will keep appreciating and at the same time eventuality of death, the sum assured will likely make any good deficit.
outstanding including interest should be capped if the borrowers survive the term of loan. The borrower must undertake to pay the difference from his other sources.
A p o o l a c c o u n t m a y b e o p e r a t e d b y t h e N H B o r a n y a g e n c y p r o m o t e d f o r t h i s purpose which will meet short recoveries either due to outstanding overtaking the value of property or, due to value of property falling.
Counseling to be
mandatoryc o u l d b e f r e e a s i n t h e U S a n d s h o u l d b e d o n e b y a d v i s o r s c a r r y i n g N H B certificates.
