All
you need to know about reverse mortgage
By
PV Subramanyam
(PV
Subramanyam is a financial domain trainer and can be contacted at pv.subramanyam@moneycontrol.com)
Reverse
mortgage is a financial option that senior citizen homeowners aged 60 and
above can explore. Once all mortgages on their property have been paid off,
they may borrow against the equity (or appreciation in value) of their home.
By
availing of it, he would receive payment without getting displaced from his
current residence. The option of selling his existing flat and moving to a
different place is quite traumatic for most people – and especially for
older people.
Unlike
ordinary home loans (mortgages), a reverse mortgage does not require
repayment as long as the borrower lives in the home. Lenders recover their
principal, plus interest, when the home is sold. The remaining value of the
home goes to the homeowner or to his or her survivors.
Payments
may be received in a lump sum, on a monthly basis (for a fixed term or for
as long as they live in the home), or on an occasional basis as a line of
credit. Currently at least, this is a product that is ideal for a consumer
who is asset-rich but liquidity-poor. In fact, there is no
competing product in the market.
The
reverse mortgage can be used by senior homeowners (say age 65) and older to
convert the equity in their home into monthly streams of income and/or a
line of credit to be repaid when they no longer occupy the home.
*
Tenure: Equal monthly
payments as long as at least one borrower lives and continues to occupy the
property as a principal residence.
*
Term: EMIs for a
fixed period of months selected.
*
Line of Credit: Unscheduled
payments or instalments at times, and in amount of borrower's choosing until
the line of credit is exhausted.
*
Modified Tenure: Combination
of line of credit with monthly payments for as long as the borrower remains
in the home.
*
Modified Term: Combination
of line of credit with monthly payments for a fixed period of months
selected by the borrower.
Situation
in India
We
still haven’t seen many options launched here in India yet. In fact, only
Punjab National Bank and Dewan Housing have launched the product and
executed deals. Others like Corporation Bank and ICICI Bank are all still in
the drawing board stage. SBI has postponed the launch in view of the
lukewarm response so far from the end user.
DHFL
was the first to launch the Saksham scheme on reverse mortgage in September
2006.
The
scheme is currently targeted towards urban customers. All bankers (including
a couple of foreign banks) agree that it is a very difficult product to take
to the Indian market. The main worry is the social stigma attached to
borrowing – an especially big issue in case of individuals aged 60 years
and above. Also, a chat with a senior citizen reveals that he would use the
monies from reverse mortgage for a medical emergency, but would not be
comfortable using it for say a luxury like a holiday.
Currently
there are two types of schemes available – the monthly payment scheme
and the lumpsum scheme. Monthly scheme is the standard option. Lumpsum
payment is conditional and is offered for medical treatment, loan
prepayment etc.
Eligibility
and requirements:
Individual:
Must
be 60 years of age or older
Must
own your property
Must
occupy your property as primary residence
Property:
Single
family home occupied by the borrower
Not
more than say, 17 year old building
Clear,
free title, NOC from society
The
mortgage amount is based on:
Age
of the youngest borrower.
Current
interest rate.
Lesser
of appraised value or the internal upper limit.
Financial:
No
income or credit qualifications are required of the borrower.
No
repayment as long as the property is the primary residence.
Closing
costs may be financed in the mortgage.
What
you need to know
Reverse
Mortgage is ideal for someone who is 70 years and above, living in a
property worth at least Rs 30 lakh and above. For senior citizens less
than 70 years of age, the loan amount will not be attractive enough to
justify mortgaging their property. The older a borrower, the larger the
percentage of the home's value that can be borrowed.
The
hallmarks of a good reverse mortgage product are flexibility, availability
and simplicity of use. It should also give an easy exit clause and be
subject to the banking Ombudsman’s jurisdiction.
As
a consumer you should be aware of the eligibility -- the property should
not be more than 20 years old for availing reverse mortgage. It is better
to avail of a joint liability scheme, though the amounts will be lower.
Valuation for the property is done by the lending institution and is the
basis for payment. This may differ from the perceived value of the
property.
What
should you be aware of as a consumer? You ought to look at the systems of
the bank and its capability to handle this product, which will be a little
complex to start with.
There
are no asset or income limitations on borrowers receiving reverse
mortgages. The only condition is that this money should not be invested in
a business.
The
company assesses the value of the property and lends about 30 per cent of
the value to a customer in the age group of 60 years
and about 60 per cent to those of 80 years and above. (DHFL)
Options
One
option that some senior citizens could consider is going to quality
retirement homes, and selling/ renting their property asset. However this
also involves going to a new place and creating a new infrastructure for
yourself – from a grocer, a maid, a cook, a doctor, a bank, a CA to
filing your IT returns. Many people find this intimidating.
These
products are still evolving. But it helps that the Central Government is
keen on this, and that we have more than 30 years' experience of the
developed nations to guide us.
