Estimates show that India’s old age population will increase to 113 million by 2016, 179 million by 2026, and 218 million by 2030. Life expectancy, currently at 77 years could increase to around 80 years by 2020. With the increasing old age population and life expectancy, Reverse Mortgage introduced by Budget 2007, seems to have a potential market in India. This concept, although new in India is very popular in countries like United States, Canada and Australia, while it is in infancy in Europe and Singapore.
Reverse mortgage is a loan given to senior citizens by converting the equity in a house property into an income stream. The scheme involves the borrowers (senior citizens) pledging their house property to a lender (scheduled bank or HFC) in return for a lump sum or periodic payments spread over the borrower’s lifetime.
The home owner is not obliged to repay the loan during his lifetime. On his death or leaving the house permanently, the loan is repaid along with accumulated interest, through sale of the house property. Any excess amount will be remitted to the borrower or his heirs. The lumpsum or periodic payments can be utilized by the borrower as per his needs but not for speculative purposes.
Reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. Unlike a regular mortgage, the borrower can continue to stay in his mortgaged home during his entire life span without any fear of eviction even after the tenure expires.
Recently, National Housing Bank (NHB), a subsidiary of Reserve Bank of India (RBI), announced its final operational guidelines on reverse mortgage. Following are some of the key features of the scheme:
- The facility will be made available to those above the age of 60 years; Joint ownership with spouse is also permitted even if one of the borrowers is below 60.
- The scheme applies only to self-acquired and self-occupied properties, owned by senior citizens and having a residual life of atleast 20 years.
- The amount of loan would depend on the market value of residential property, as assessed by the primary lending institution (PLI), age of borrower and prevalent interest rate.
- The PLI should ensure that the borrower’s equity in the residential property does not fall below 10% during the tenor of the loan.
- The borrower will not be required to pay any penalty towards prepayment of loan.
- The lending institutions can frame their respective internal policy guidelines but the same should be fully disclosed to the potential borrowers upfront.
- The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
Reverse mortgage is definitely a financial helpline for senior citizens enabling them to lead their lifestyle and meet their consumption needs without being dependent on anyone. It is the social security scheme for the benefit of senior citizens post-retirement. With very few universal old age social security schemes, reverse mortgage might have a potential market. The loan is given without any income criteria at an age where normal loans are not available. Perhaps, the most important advantage being that the borrower retains the ownership title of the house making it all the more popular among Indians who have a natural instinct for own home.
However, on the flip side, traditional joint family system, stronger bequeath motive and widespread undervaluation of real estate properties involving unaccounted money, tax evasion and benami holdings can be major deterrents for the scheme to take off.