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:
Life-time payments till demise of surviving borrower.
No repayments till borrower lives and occupies the house.
Single collateral; borrower liability not to exceed house value.
Loan settlement through sale of house.
Heirs may repay through sale of house.
Ergo, RM is beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.