Reverse Mortgage scheme needs revision

Reverse mortgage scheme was launched in the union budget of 2007-2008. The National Housing Bank has been given regulatory powers for the same. NHB came out with the necessary guidelines and today many banks both nationalised and private and NBFCs are offering this scheme. But the question is whether it has reached to common people who really need this. The answer is big No. Five years are complete but we have not seen major movements in this area. Banks and NBFC are also not promoting this scheme like other loans. Lack of awareness amongst the people and some basic defects in the scheme make it unpopular. NHB should take immediate steps to rework the entire reverse mortgage scheme and make it more lucrative and beneficial so that senior citizen can take the advantage of the scheme. One should note that this scheme is one of the social security measures which should to be seriously looked into.

The scheme is targeted to the senior citizens who owns home but find it difficult to meet the day to day household expenses of the family. The salient features of the scheme which requires revision are as under:

1) Any person who is senior citizen of India above 60 years age is eligible to take reverse mortgage. Married couple are also eligible as joint borrowers provided at least one should be above 60 years and the other should not be below 55 years. The scheme should reduce entry age to 58 years as 58 years age is retirement age in many Government organisation. The scheme should also be available to all the persons above 55 years if they have taken VRS from their job. The senior citizen scheme of post office gives this relaxation to persons who opted for the VRS.

2) Borrowers should be legal owners of the self acquired and self occupied residential property located in India and property should be free from any encumbrances. There has to be some relief if there is home loan pending and couple is finding it difficult to service the loan. The cap of lump sum withdrawal of Rs. 15 lakhs should be increased to 25% of the market value of the property or Rs. 30 lakhs whichever is lower as the property value has doubled in last five years.

3) The maximum amount of loan available today is 45% to 60% of the market value of the residential property and that also depends on age of the borrower. The age criteria should be removed and the loan should be available up to 80% of the market value and to be at par with housing loan.

4) There are many banks which offers loan up to 15 years only. The Maximum disbursement period should be made mandatory to 20 years.

5) The maximum monthly payment at present restricted at Rs. 50,000 p.m. which also to be doubled to 1 lakh looking at the increasing inflation over last five years. 6) The rate of interest at present is around 11% to 12% p.a. which high and to be reduced to base rate as the scheme is targeted to senior citizens who does not have other source of income. The Government should also consider giving subsidy for reverse mortgage. The Government is already giving subsidy on home loan and education loan and than why not to reverse mortgage.

Looking at higher inflation number, growing medical bills and other health issues the scheme requires major revision. Today at least 10% of the population is senior citizens and is likely to increase in coming years. The average life of an individual in India is rising and is likely to be 75 to 80 years in next decade due to advancement of medical facilities. It’s high time that reverse mortgage scheme should be revised in the interest of people at large.

This article first appeared at myiris.com on 20th July'2012

http://www.myiris.com/financial/storyShow.php?fileR=20120720093601715&secID=finan&secTitle=Financial&dir=2012/07/20

Reverse Mortgage – an alternate retirement plan

Retirement planning is one of the most important goals of every individual and we make every effort to ensure the same. We need to understand that we have limited resources and our needs are multiple. We have to fulfil many financial goals in the life with limited surplus available month after month. But what happens if you do not have necessary resources and unable to fund life’s most important goal. Nowadays expenses have shoot up due to double digit inflation. Education costs are also increasing at more than normal inflation rate. Lifestyle expenses and EMIs of various loans have also gone up, leaving limited surplus for investment. In such situation we have to reduce our goals or drop a few goals as not achievable. We mostly compromise our other goals without looking at other options available. When it comes to retirement planning, we advise our clients that there is nothing to worry as your  self -occupied property can always come to your rescue. Whenever we find there is not enough surplus and is not possible to fund retirement funding fully, instead of compromising on other major goal of education or marriage, we always allocate existing home towards retirement goal. Normally self occupied house is taken as personal asset and is not allocated to other goals while carrying out financial planning. But, in rare case when it is difficult to fund retirement fully, we allocate existing home towards retirement goal and ask client to opt for reverse mortgage after retirement when there is no other alternative is left.

Reverse mortgage is exact reverse or opposite of mortgage loan. In mortgage loans you mortgage your property with the bank or NBFC and take a loan and repay the loan in monthly instalments which are known as EMIs. In reverse mortgage instead of paying EMI to lender, lender will pay you monthly instalments against the property till you are alive and there is no need to repay the loan amount and interest part as long as you are alive. The scheme is framed to help the senior citizens who own home but find it difficult to meet day to day household expenses of the family. The salient features of the scheme are as under:

1) Any person who is a senior citizen of India above 60 years age is eligible to take reverse mortgage. Married couple are also eligible as joint borrowers provided at least one should be above 60 years and the other should not be below 55 years.

2) Borrowers should be legal owners of the self acquired and self occupied residential property located in India and property should be free from all encumbrances.

3) The maximum amount of loan available ranges between 45% to 60% of the market value of the residential property and age of the borrower.

4) The Maximum disbursement period is 15 to 20 years depending on bank to bank.

5) The maximum monthly payment at present restricted at Rs. 50,000 p.m.

6) The rate of interest at present is between 11% to 12% p.a.

7) Residual life of the property should be at least 20 years.

8) The prospective borrowers should use that residential property as permanent primary residence. 

9) The ownership of the property remains with the borrowers

10) The revaluation of property is required to be done once every 5 years.

11) The borrowers can pre pay the loan at any time during the loan tenure and there is no pre payment penalty for such prepayments.

12) The loan is repayable only in case of death of last surviving borrower or borrowers would like to sell the home or would like to permanently move out of the home.

13) The borrowers and their heirs have the first right to settle the loan along with interest due, without sale of property.

14) The balance amount if any remaining after settlement of the loan is paid to borrower/s or their legal heirs as the case may be.

15) All periodic payments are exempt from income tax under Section 10(43) of the Income-tax and is also specifically provided u/s 47 (xvi) that any transfer of capital asset under reverse mortgage scheme shall not be treated as transfer and hence no capital gain tax is payable.

Reverse mortgage can really help you in rainy days to maintain the same standard of living even you do not have other source of income. It is advisable to compare the schemes offered by different lenders before opting for it.

This article first appeared at myiris.com on 10th July'2012.

http://www.myiris.com/financial/storyShow.php?fileR=20120710174648715&dir=2012/07/10