EARN FROM YOUR HOME AFTER RETIREMENT
Until recently, residential property could either be used for accommodation or as a source of rental income. From 2007, homeowners got a chance to have their cake and eat it too. The Reverse Mortgage Scheme introduced by the National Housing Bank allowed senior citizens (those over 60 years of age) to monetise their property to meet their expenses.
It has been observed that senior citizens, because of their old age, become dependants on their sons and relatives. In the organized sector, there is a provision for pension also. However, there are some sectors where there is no provision for pension. At the same time, the pension amount is so meager that it is hardly sufficient to meet their medical treatment and contribution to the education and marriage of their grandchildren. As a result, they are treated as burden by their sons and relatives. The senior citizens, in the absence of regular income, are not able to play their social obligations effectively.
This is where reverse mortgage can be of great value.
First let us understand what Reverse Mortgage is…?
The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can mortgage his property with a bank or housing finance company (HFC) and the bank or HFC pays the person a regular payment. The good thing is that the person who ‘reverse mortgages’ his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, you continue to stay at the same place and also get paid for it. Where is the catch? The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the place, and to recover the loan. It passes on any extra amount to the legal heirs.
The whole idea is entirely opposite to the regular mortgage process where a person pays the bank for a mortgaged property. Hence it is called reverse mortgage. This concept is particularly popular in the west.
Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
Let”s take an illustration to understand Reverse Mortgage.
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.80lakh, but he has limited savings (including PPF and EPF) of Rs.10lakh 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.
Here is how reverse mortgage would work for him.
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 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 8%-10%.
Second important variable is the loan to value ratio. Most loans against property work at 60% loan to value ratio — i.e. by pledging a Rs 1 crore property, you can get a Rs 60 lakh loan. Some banks are however designing reverse mortgage products with a higher loan to value ratio — as much as 90% in some cases.
Hence, coupled with his income from financial assets, he can continue to live comfortably with no cutback on lifestyle.
Feature of reverse mortgage in India as per guidelines prepared by RBI.
- Any house owner over 60 years of age is eligible for a reverse mortgage.
- The house should be owned by the prospect before lending i.e. all outstanding loan payments before mortgaging should be paid off.
- The maximum loan is up to 60% of the value of 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.
- 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.
- The specific annuity paid out also depends on the age of the home owner. Higher the age, higher the annuity everything else being constant.
- The money cannot be used for speculative purposes such as investing in shares, real estate, trading and so on.
Benefits of a reverse mortgage:
- Retain the ownership of your home for life. The remaining equity will be passed on to your heirs.
- Proceeds from reverse mortgages are tax-free. Proceeds could be used for: In-home care, Home repairs & improvements, paying off an existing mortgage, Education of grandchildren, Hospital & health care costs, paying off taxes and credit card debt, buying a second home, and Travel. Let your home pay you back!
- No loan repayment or payments as long as you live in your home.
- No income, medical or credit requirements.
THE PAST & THE FUTURE OF REVERSE MORTGAGE IN INDIA…..
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. 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 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 behaviour 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 the last couple of years, reverse mortgage has been touted aggressively as a product that will allow the elderly to unlock the value of their house. In fact, in the last two Union Budgets, the finance minister has made a special mention about it.
Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
It can certainly light up the twilight years when all other alternatives have been exhausted
