REVERSE MORTGAGE

REVERSE MORTGAGE

The average life span of an individual in India has been steadily increasing over the years. The increase

in longevity is amplified by the fact that the average life expectancy of an individual which was 42 years

in 1947 had increased to 64 years in 2008. A variety of reasons like, improved standards of living, better

health care facilities, etc. are attributed to this. Although, the increase in life expectancy of an individual

speaks volumes of the country’s progress socially, it has however brought along with it new economic

challenges for the senior citizens.

Unfortunately, the social security blanket available in the developed countries is not there in India to the

extent desired. Therefore, the erosion in savings due to rising cost of inflation, the absence of social

security or old age pension, fall in the real value of pension when received and the rising cost of health

care has not augured well for the senior citizens and has made sustenance difficult for them. Besides

other social issues like nuclear families, migration of children or being childless, have also contributed

significantly to the economic struggle of the senior citizens.

In a majority of the cases, it has been observed that they have property which however is non-income

generating. These people have often pooled their life savings in the creation of their wealth – i.e., real

estate, without having sufficient liquidity to care of their day to day requirements. While the value of the property has been spiraling, so has the cost of living. The senior citizens, many times, are therefore left

with little option but to sell their property or move out to maintain their living standards or to meet their

medical exigencies.

The economic paradox faced by the senior citizens in India today was witnessed in the West in the 1920s

– 1930s in the wake of the Great Depression. It was against this background that the idea of Reverse

Mortgage Loan took shape in the United Kingdom in 1929. The Reverse Mortgage in vogue today, has

evolved over the years from the developed countries especially, USA. It is equally applicable in India in

the present environment although the concept is still in its infancy. Reverse Mortgage Loan (RML) as a financial product is therefore to be perceived, understood and appreciated in the context of the necessity for additional income by the senior citizens.

Reverse Mortgage Loan, seeks to generate income from the property owned and resided in by the senior

citizens to enable them to lead an independent and dignified life. For these citizens, it is an additional

mechanism to supplement their existing sources of income, while at the same time remaining the owners

of their property and continuing to occupy it. Besides, they are also freed from the burden of repaying

the loan / servicing the interest.

Under the scheme, a senior citizen- aged above 60 - (borrower), mortgages the self occupied residential

property belonging to him / her to a banker (lender), who on assessment of the market value of the

property will make a periodic payment to the borrower during his / her lifetime. The borrower does not

have to repay the loan or interest to the lender and can continue to occupy the property. The loan (including accumulated interest) is repaid from the proceeds of the sale of the property, on the death of the borrower / in the event of the borrower leaving the property permanently. The mortgage may also be released if the loan and interest is repaid by the heirs/borrower.

It is pertinent to note that for taxation purposes, Reverse Mortgage, does not imply transfer of the

property and the income received by the borrower would also not be treated as ‘income’. A borrower,

under reverse mortgage, shall, however, be liable to income tax (in the nature of tax on capital gains)

only at the point of sale of the mortgaged property by the lender for the purposes of recovering the loan.

All payments under RML shall be exempt from income tax under Section 10(43) of the Income-tax Act,

1961.

Differentiating between Mortgage and Reverse Mortgage

In a normal housing loan, where the property being purchased is mortgaged to the lender, the borrower

avails a loan to begin with and at that point of time, his stake in the property purchased is low. As the

regular EMI is paid on due dates, the loan amount reduces and his stake in the property increases.

However, in Reverse Mortgage, the position is exactly the reverse. Under RML, the borrower initially

retains a high stake in his property and receives a regular cash flow. Over time, when the loan amount

increases, his stake in the property reduces.

Reverse Mortgage Loan - Salient features

The scheme was introduced in India in 2007 and made applicable with effect from April 01, 2008.

Banks like State Bank of India, Central Bank of India etc have issued guidelines under RML. The basic

guidelines regarding the scheme have been framed by National Housing Bank, a subsidiary of Reserve

Bank of India; the details of which are available on the website of NHB. The salient features of the

scheme are briefly elucidated below:

• A senior citizen who is above 60 years is eligible for a reverse mortgage loan against his own and
• self occupied residential property. He / She can continue to occupy the house. The borrower will not be called upon to service the loan during his / her lifetime. The loan amount may be used by the borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.
• Married couples will be eligible as joint borrowers subject to the condition that one of them is above 60 years and the other not below 55 years.
• The property should have a clear title and should be free from encumbrances. The residual life of

the property should be at least 20 years.

• RML is not available against the security of commercial property.
• The owner of the residential property and his/her spouse are generally joint borrowers and the
• surviving borrower is allowed to retain the property till his / her death.
• The loan amount will be based upon the market value of the property and could range from 60% to 90% of the value of the property depending on the age of the borrower (s); with the interest rate being market driven.
• The loan installments could be paid through monthly/quarterly/half-yearly/annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three. As per the guidelines, the maximum monthly payment is pegged at Rs. 50,000.00 p.m. with the maximum lump sum payment being restricted to 50% of the eligible loan amount subject to a limit of Rs. 15 lakhs, to be used for medical treatment. The balance loan amount would be paid periodically.
• The maximum period of the loan is 15 years. If the borrower outlives the maximum loan period, he/ she can continue to retain the property and need not repay the loan or service the interest. However, the periodic payments under Reverse Mortgage will cease and interest will continue to accrue till the death of the borrower or till he / she moves out of the property. In such an eventuality, the loan will be liquidated from the sale proceeds of the property.
• The usual charges in regard to the appraisal fee, documentation charges, etc. have to be borne by the borrowers. The borrower is required to insure the property at his own cost and is also liable to pay the taxes and statutory charges to the authorities concerned regularly.
• The banker (lender) is free to decide the periodicity of valuing the property with such valuation

being at least once every five years. The quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender.

• All reverse mortgage loan products are expected to carry a ‘no negative equity’ or ‘non-recourse’
• guarantee. In simple words, this means that the borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.
• The borrower(s)/legal heir(s) can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property. No charges will be levied if the loan is prepaid.

Formula to Calculate the Periodic Payments under RML

The formula to calculate the periodic payments, as available in the website of NHB, is as under:

Installment Amount = (PV*LTVR*I)/ ((1+I)ⁿ-1)

Where, PV = Property Value;

LTVR = LTV Ratio;

n = No. of Installment Payments;

I = the value of I will depend on Disbursement Frequency selected.

A Hypothetical Example

Value of the property	Rs. 50,00,000	Rs 50,00,000
Loan Amount	80%	90%
Loan Tenor	15 years	15 years
Rate of interest	10%	10.50%
Monthly installment	Rs. 9651	Rs 10,368
Quarterly installment	Rs. 29,414.	Rs 31,638
Yearly installment	Rs. 1,25, 895	Rs 1,36,116

The spread of Reverse Mortgage, in the western countries has been very good. The scheme has however

been a slow starter in India. As per a report published in the Business Standard on May 24, 2010,

according to NHB, as on March 31, 2010, around 7000 reverse mortgage loans for Rs 1,400 crore have

been sanctioned. Although the numbers, per se, appear to look reasonable, there is still a lot of room for

higher off take of loans under RML. In order to provide an impetus, certain improvements have been

made in the scheme like annuity linked plan assuring lifetime payments even after the completion of the

term, higher annuity without lump sum loan option etc.

Some of the reasons for the scheme not being as successful as envisaged could be due to lack of awareness of the product, inadequate marketing, disputed title deeds, etc. Hopefully, these bottlenecks will be removed paving the way for a better and brighter future for the senior citizens of our country.