Reverse Mortgage in India
The Union Budget 2007-2008 has introduced a novel product for senior citizens called as ‘Reverse Mortgage’ and has asked the National Housing Bank (NHB) to draft Guidelines. The Guidelines have now been framed and issued by NHB and many banks / financial institutions are slated to introduce the ‘Reverse Mortgage Scheme’ in the coming months. The Budget Speech Para, 89 says:
“The National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a ‘reverse mortgage’ under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan.”
Relatively a new concept for the Indian financial services industry, introduction of this scheme is expected to give scope for financial innovation and an opportunity to bank upon the Senior Citizens by making their physical asset i.e. property, a hen laying golden eggs.
Concept of Scheme:
In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (equated monthly installments), which comprise of both principal and interest amounts. The property is utilised as a security to cover the risk of default on the borrower’s part. Reverse Mortgage is exactly the opposite of regular mortgage. The payment stream flows from the housing finance company to the borrower which is the reverse of a conventional mortgage.
In this scheme, a senior citizen of 60 years or more, who owns a house, can be given loan up to a fixed amount worked out on the percentage basis of the market value of the house owned and given on mortgage. The loan would become due and payable only when the last surviving owner dies. The settlement of loan disbursed, along-with accumulated interest will be met from the proceeds of sale of the house. If the heirs of the borrowers so decide, they can keep the property after paying the amount of the loan and interest due. If the borrower desires to settle the loan before 15 years, he can also do so.
The Scheduled Commercial Banks and Housing Finance Companies are expected to be the main agencies to undertake the implementation & commercialization of this scheme.
Reverse Mortgage in America & Australia:
‘Reverse Mortgage’ scheme has been in existence in the Western countries and particularly famous & quite successful in United States of America. It can be gain said that, this concept has been taken from America and is being customized to suit Indian needs. In US, National Reverse Mortgage Lenders Association (NRMLA) was established in 1997. NRMLA is the national voice for lenders and investors engaged in the reverse mortgage business. NRMLA fulfills several roles, which include educating consumers about the opportunity to utilize reverse mortgages, training lenders to be sensitive to the needs of older Americans, developing Best Practices and enforcing a Code of Conduct to make sure lenders participating in the program treat seniors respectfully, and promoting reverse mortgages in the media. However, since there are already established social security benefits for the US citizens, the proportion of reverse mortgage loans in the US is relatively very less compared to the overall population.
In Australia, reverse mortgages were tried in the 1990s but the concept was withdrawn due to a lack of consumer demand. But now the reverse mortgage market in Australia is more than $1.1 billion at 30 June 2006.
Advantages of the scheme
(i) The house can remain occupied by the mortgager or his/her spouse during the period of their lives.
(ii) The loan, in the form of a lump-sum or monthly installments, is not required to be paid during the life-time of the person, mortgaging the house or his/her spouse.
(iii) The provision in the scheme for revision of the value of the house every five years when market value rises can enable the mortgagee to get a higher amount (as loan or installments) if the value gets enhanced.
(iv) The mortgage is to be for 15 years. If the mortgager or the spouse survives beyond this period, they will not be evicted but will continue to live in the house till the last of the spouse survives. Of course, in the meantime, the interest on the loan amount will continue to be charged. However, if the installment system of loan is chosen, the installments will stop after 15 years.
(v) If the borrower or the spouse dies early i.e. before 15 years, the amount to be recovered would be only that, which has been given to the borrower or spouse by way of loan or in installments.
(vi) If surplus remains after the sale of the property mortgaged after adjustment of loan and interest amounts, the balance would be refunded to the heirs of the mortgager.
(vii) The heirs, if they want to retain the property can do so by paying the amount of loan with interest to the lender bank.
Taxation:
The Central Board of Direct Taxes (CBDT) is yet to clarify whether the payments received by the mortgagee (senior citizen) should be treated as ‘income’ of ‘loan’. In many countries, the payment received is considered as a ‘loan’ and not as ‘income’ from the tax angle. It would be beneficial if the ‘payments’ could be treated as ‘Income’ and made tax-exempt under Section 10 of Income Tax Act, 1961, considering the very narrow scope of earning returns from investments for senior citizens.
Further, there still remains an ambiguity and anomaly regarding the ‘age’ at which a person is to be treated as a ‘Senior Citizen’. The Income Tax Act considers a Senior Citizen as a person of and above the age of 65 years, however this scheme says that, citizens over the age of 60 years are eligible. This aspect needs to be fixed and uniformity is much needed at an earliest.
Indian Scenario:
Dewan Housing Finance Limited (DHFL) was the first to launch the ‘Saksham Scheme’ on reverse mortgage in September 2006.
Senior citizens particularly from the Metros and Tier I cities are expected to take advantage of this scheme.
Given that, in India there is no definite Social Security programme, this scheme benefits the ‘Asset Rich but Cash Poor’ senior citizens. Reverse Mortgage can surely be considered as a derivative instrument to hedge risk arising out of retirement and inability to work due to old age. Considering India’s population, a small proportion of senior citizens are a huge potential for this scheme. Overall, Reverse Mortgage can be successful in India.
Risks:
Property price fluctuations, particularly in the Metros and Tier I cities are one of the major risks for the lenders. If the property value drops to such an extent that it becomes less than the loan amount, the lenders face the risk of loss.
Interest Rate Risks & Inflation risks are other risks. Legal risks may arise if the lender if not able to bring the underlying property to sale, due litigations and longer court procedures.
Needless to say, such scheme ought to have a plethora of Disclaimers and Fine Prints, which if not read attentively, pose a risk to the borrower i.e. Senior Citizen.
Author: Anand Wadadekar
Article Source: EzineArticles.com
Provided by: Canada duty rates
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