With the new reverse mortgage product, senior citizens have a real possibility of encashing the value of their homes, by getting a regular income from it, while still living in it until the end of their lives
The National Housing Bank (NHB), along with the Central Bank of India and Star Union Dai-ichi have launched a new Reverse Mortgage product, which, for the first time, offers senior citizens a real possibility of encashing the value of their homes, by getting a regular income from it, while still living in it until the end of their lives.
Reverse Mortgage (RM), as the name suggests, is a product for senior citizens. It is defined as an agreement by which a homeowner borrows against the equity in his home and receives regular tax-free payments from the lender. The property is assessed and the company offering the RM decides on a fixed monthly instalment to be paid against it, which includes interest on the loan against the property. The person going in for this product will continue to live in that home for his/her lifetime along with his/her spouse. On the demise of the homeowners, their heirs have the option of reclaiming the property by paying off the outstanding loan with interest.
This product is a boon in the post-liberalisation era, where senior citizens have suffered deterioration in their lifestyles, because most of their savings are locked in their homes; high inflation and volatile interest rates have depleted their other income. In a nutshell, RM is the exact opposite of a conventional mortgage.
The new product was introduced by PR Jaishankar, assistant general manager of NHB at a brain-storming session at Moneylife Foundation with over 20 of the leading NGOs working with senior citizens—including Dignity, Helpage, Silver Innings and the Family Welfare Agency—attending the proceedings.
Mr Jaishankar's presentation explained in detail how the new product was far superior to the earlier offerings. He said that this product, the Sud Life Reverse Mortgage Loan/Annuity Plan was being offered with Central Bank (of India) and Star Union Dai-ichi Life Insurance. He credited NHB chairman S Sridhar for his untiring efforts in structuring a product, whereby the risk involved is distributed between the bank and the insurer.
The value of the property is assessed at 60% for a 60-year-old and rises to 75% for a 75-year-old. Mr Jaishankar said that property worth Rs50 lakh can fetch a senior citizen anywhere between Rs34,000 to Rs50,000 a month, depending on the option availed.
RM has been a non-starter in India for several reasons. First, unlike in the US, the government does not bear the insurance risk or the property fluctuation risk. Consequently, there was a steep haircut on the value of the product and an inconsequential monthly payment to the senior citizen.
There is also the issue of whether the government will gouge tax from seniors on the monthly income, even though the home asset is usually built out of post-tax savings. However, this issue is with the Central Board of Direct Taxes (CBDT) and should hopefully see a decision in favour of the country's elderly population.
Interestingly, while the capital value of a home is converted into an annuity over the homeowner's lifetime, the RM product ensures that the monthly income steadily rises as the senior citizen gets older. That is because the haircut on the property value is lower when the senior citizen is older, because life expectancy decreases.
According to Mr Jaishankar who authored this project, the benefits are going to be revolutionary.
The benefits will be as follows:
Ergo, RM is beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
The total assets under management of the 37 fund houses are down by 20% from last month and equity mutual funds have witnessed redemptions in March
After sailing in positive territory last month, equity mutual funds have again witnessed an outflow in March. Equity schemes recorded Rs2,016 crore of redemption in March compared to Rs1,514 crore net inflow in February while the BSE Sensex gained 7% during the same period. The net inflow for equity funds for the entire year now stand at just Rs595 crore. The assets under management (AUM) of equity schemes has increased 3% in March at Rs1,74,054 crore from Rs1,68,672 crore while the combined AUM of all schemes declined 20% in March from Rs7,66,869 crore in February 2010. The decline was mainly due to money moving out of liquid funds.
Redemptions of all combined schemes jumped 81% at Rs99,35,942 crore in FY10 compared to Rs54,54,650 in the previous year. March witnessed Rs11,27,635 crore redemptions, up 50% from February which saw redemptions of Rs7,52,798 crore. There is a sharp increase of 51% redemption in March 2010 compared to the corresponding period last year.
“Markets are improving so there is some profit booking. Very restrictive NFOs were allowed during this year. There was also a pressure on commission paid to distributors,” said D Mohanty, country head (Retail), UTI Asset Management Company Ltd (UTI).
A change in attitude and good financial advice could help senior citizens to plan for regular post-retirement income that is also tax-free
Speaking at the Moneylife Foundation brainstorming session on senior citizens' issues on Friday, Dr S A Dave (former chairman of SEBI, UTI and the committee on pension reforms) said that retirement planning needed to start earlier and it required attitudinal change, even on the part of senior citizens to relinquish dependency. On a personal note, he said, that the 60-plus age group is often referred to as the 'silvers' but he personally considers this a 'golden' period of his life, despite having gone through the usual medical issues including knee replacements, bypass surgery and cataract operations.
“We should start enrolling people as members of senior citizens not when they become the prescribed age of a senior citizen but when they become 45 years,” Dr Dave said. He said that we must emulate the US All American Retirement People (AARP) like system where its massive membership allows it to run its own insurance policy, pharmacy, hospices and also had powerful lobbying power with the government.
A change in attitude and good financial advice could help senior citizens could plan for regular post-retirement income that was also tax-free. He advised NGOs who attended the meeting to work jointly to be able to lobby effectively for specific actions and concessions but also work together to ensure a large membership that could put in place—facilities such as insurance, healthcare, hospices and other facilities there was independent of the government.
Dr Dave also pointed out that by 2015 more than 10% of India's population would be made up of senior citizens and we must all prepare for it. He advised NGOs to work with the corporate sector to publicise their work and enlarge membership.
The meeting saw active participation by a dozen-odd NGOs, every one of them with long years of experience of working on senior citizens’ issues. A common refrain among NGOs was the lack of proper thought and the non-implementation of the National Policy for Senior Citizens. It was pointed out by Dr Sheilu Srinivasan of Dignity Foundation that several tax changes proposed by the government are extremely harsh on senior citizens. "We strongly feel that in a country offering nil social security umbrella to elders", the government has to ensure secure, long term investment opportunities for its citizens, she said.
Mr B N Makhija, a former bureaucrat and civil society activist made the very pertinent point that the working lives of most senior citizens today were in the pre-liberalisation era, while their savings, which are to see them through their old age, are subject to new rules and volatility of the post-liberalisation regime, that too without any social security. Shailesh Misra of Silver Innings listed a series of issues that need to be addressed urgently and pointed out that even the age for deciding who is a senior citizen is not uniform—the ministry of social justice and empowerment has fixed it at 60 while the Finance Ministry has fixed it at 65.
Nagesh Kini spoke about the 25 May 2009 guidelines by the insurance regulator (a result of a landmark 2008 Supreme Court judgement) which will hopefully eliminate the adverse bias against senior citizens by categorising them as a separate risk class, thereby marginalising them and leaving them open to galloping increase in premium.
A big issue was the harassment caused through Tax Deduction at Source (TDS) and in the redemption/withdrawal of savings instruments such as post-office schemes and pensions.
The problems with insurance cover
The evening saw a detailed presentation on the new Reverse Mortgage Loan facility announced by the National Housing Bank, which is being offered by Central Bank of India along with Star Union Daichi Life Insurance—this scheme is a marked improvement over earlier versions and promises to give senior citizens a decent sum of money every month. However, as always, there are niggling issues over tax payable on this income, which need to be sorted out to make it workable.
Moneylife Foundation intends to consolidate all presentations and papers offered by all the leading NGOs working for senior citizens, so that a joint representation can be made to the government. These will cover issues relating to savings, pensions, tax deduction at source (TDS), wills, reverse mortgage, mediclaim and insurance issues.
Suggestions are invited from all organisations and individuals working in this space and can be emailed to [email protected]. The workshop was supported by Indiabulls Financial Services.
Pictures of the event