(in Indian scenario) Authors: (1) Dr.R Venkataraman, Professor, Presidency College, Bangalore

Transcription

1 Reverse mortgage: Bringing smiles on wrinkled faces (in Indian scenario) Authors: (1) Dr.R Venkataraman, Professor, Presidency College, Bangalore Abstract (2) Archana Mishra, Asst. professor, Presidency College, Bangalore Life is unpredictable at every step and this is why in order to face the future contingency we generally save money, especially for those days when due to the age people are not able to work also. Now a days more than saving people are more interested in investment. Many plans are available that gaze into the future and foresee financial stability during old age. The concept of reverse mortgage is also getting popular in India. The finance minister of India had introduced Reverse mortgage in the budget of and the responsibility of preparing the regulations was assigned to NHB (National Housing Bank) which is a subsidiary of Reserve Bank of India. Reverse mortgage is the scheme under which a lender advances money to an older person in return for a future claim on his/ her home. Reverse mortgage provides income that people can tap into for their retirement. At present this facility is available in India for senior citizens but still it has not got that popularity as it is in UK and other countries. The present paper is to provide in-depth information of the reverse mortgage scheme and banks offering it. This will enable us to understand the importance of RMS for the Indian society and it will also make us to understand that why this golden plan has still not got popularity in India. Key words: reverse mortgage, financial stability in old age, schemes for senior citizens

2 Introduction: We, Indians give strong values to family relationships. It is our culture that has been followed from olden days. In earlier days and in some parts of India still, there are joint families where a number of children will be there. They learn to share what they have with others, to love and respect elders, to adjust themselves to the society or others from their younger age. But nowadays the number of joint families is getting low. Parents are working. Children are studying apart from their parents. They can t always stay together with their grandparents. Thus the concept of nuclear families has emerged. In nuclear families, there will be father, mother and at most two children. Also the income of parents is more compared to those in olden days. So children are given better education. Children are over pampered and they are given what they want. They needn t have to share anything with others; they are satisfied with what they have. In this system both parents and children are too busy in their own life. They don t get time to spend with their family members. That is why the kids do not learn moral values compared to those in the last generation. When these children grow up, they do not consider the words of their parents. Slowly and gradually Indians are adopting the western culture in their family. Now parents who are in their old age they normally don t have someone who can take care of them. In order to help these people in generating a regular income and for providing financial securities to them the plan of Reverse Mortgage is introduced.. Almost before a decade there were only two methods available in India to the elder people to get some cash on the house property. First one to sell it at the time of the need or else to go with the traditional loan plans in which at every interval the loan installments are payable with huge amount of interest. But luckily now there is one new plan available for senior citizen which is known as Reverse Mortgage

3 Scheme. This concept is very popular in USA. This unique plan is designed in such a way so that it gives the maximum benefit the senior citizens at the time of their financial need. The finance minister of India had introduced Reverse mortgage in the budget of and the responsibility of preparing the regulations was assigned to NHB (National Housing Bank) which is a subsidiary of Reserve Bank of India. Reverse mortgage is the scheme under which a lender advances money to an older person (of the age 60 or more) in return for a future claim on his/ her home. Reverse mortgage provides income that people can tap into for their retirement. At present this facility is available in India for senior citizens but still it has not got that popularity as it is in the other countries. Objectives of the paper:- 1) To bring out the concept of Reverse mortgage. 2) To bring awareness in society by providing in-depth information about advantages and eligibility criteria of reverse mortgage. 3) To analyze the forces affecting reverse mortgage. 4) To perform SWOT analysis. Methodology: This paper is basically a conceptual paper & the information was gathered from various websites, journals & research papers. Reverse mortgage: a golden walking stick

4 It is a financial support plan available only to people of age group 60 & above who have a clear title of a house property in their name. In this plan bank provides 40-60% amount of the valuation of the house as loan which can be taken by the borrower in lump sum or installments as per their convenience. This loan is for tenure of 15 years till the time borrower can reside in the house. On the completion of the tenure the borrower will not be getting any cash inflow but he/she can continue staying in that house till death. In case of death of the borrower the benefit will be given to his or her spouse. After the death of spouse of borrower the legal hires will have to pay the loan amount with interest if they want possession of the property. The valuation of the house has to be revised at proper intervals or maximum in 5 years. One of the main advantages of a reverse mortgage is that the borrower's credit is not relevant, and is often unchecked, because the borrower does not need to make any payments because the home serves as collateral. Eligibility for Reverse Mortgage Loan (RML) 1) House owners above the age of 60 years. If spouse is a co-applicant, then she should be above 58 years. 2) Owners of a self-acquired, self occupied residential house or flat, located in India. The titles should be clear, indicating the prospective borrower s ownership of the property. 3) Property should be free from any encumbrances. 4) The life of the property should be of minimum 20 years. 5) Property should be the permanent primary residence of the individuals.

5 Guidelines of RBI for reverse mortgage:- 1) Any house owner over 60 years of age is eligible for a reverse mortgage. 2) The maximum loan is up to 60 per cent of the value of the residential property. 3) The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company). 4) The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion. 5) The revaluation of the property has to be undertaken by the bank or HFC once every 5 years. 6) The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. 7) The loan can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower. How RML is different from Traditional Method Loan (TML)? 1) Age group: - People from any age group are eligible for TML but RML can be applied only by people of age group 60 & more. 2) Purpose of loan:- The loan amount of TML can be used for purchase, repairs, maintenance of home in case of RML loan amount is to generate regular income so that the borrower can fulfill their regular needs. 3) Effect on equity during loan:- In TML as the borrower makes the monthly payments the amount of loan decreases but the equity increases. whereas in RML as the borrower receives the payments from lender loan increases but equity decreases.

6 4) Effect on equity at the end of loan:- In TML at the end of loan borrower owes nothing but full equity on the property. In RML borrower owes the loan amount but equity will be nil. 5) Type of the transaction:-tml is a transaction of falling debt & rising equity where as RML is a transaction of rising debt and falling equity. Benefits of RML:- 1) The inflows of funds are tax-free till the borrower lives in the same house property. 2) Repayment of the loan is not required till borrower resides in that house. 3) For procurement of loan income proof, medical checkups& credit eligibility formalities are not required as the house property in this case is available as collateral securities. 4) Incase of TML the amount should be used only for the construction, repairs or maintenance of the same house on which the loan is taken but in here the loan amount can be used for the medical purpose also. It is basically to generate income for the borrower 5) The loan amount can be taken lumpsum or in various installments ( monthly, quarterly, half yearly or annually) & the installments amount also can be decided by the borrower based on their needs. 6) The borrowers are protected against inflation. 7) The valuation of property revised in every 4-5 years. 8) The parson of higher age will be eligible to get higher annuity. Forces affecting Reverse Mortgage:-

7 1) High transaction cost: - The borrowers have to bear a very high transaction cost. However as compare to the initial days now it s having a declining trend because of the increasing awareness. 2) Risk of moral hazard: - There is always a great risk of moral hazard in borrower who is being responsible for home maintenance & ultimately for sale of the house property. 3) Unable to fulfill unexpected needs:- investment in house property is an important component of precautionary savings. If a house owner has already taken a RML then the ability to meet unexpected health care cost or move in to alternative house may be difficult. Especially for those who become seriously ill but they want to continue their stay in the same house will have to face many problems because there the maintenance of the house will be the biggest problem. 4) Emotional attachment:- Many elderly people may not be willing to take loan against their home because somewhere they feel that the property which they made after adding all their savings which they earned with great difficulty should not go to anyone else possession. 5) Uncertainty of taxation:- this is also a major concern where people have a confusion that if the amount of loan installments which is received by the borrower is taken as his income then will he be getting any exception on the interest amount what he is paying towards the loan amount. 6) Loss on exemption from capital gain:- since the total cash inflow of reverse mortgage is taken as tax free amount that is the reason the sale will not get benefit of capital gain as that will be considered as loan recovered not sale of house property. 7) Unclearity of the rules: - this plan is still in progressive stage where few points are not clearly defined. For example if anyone who has taken RML is

8 declared as bankrupt then how the treatment will be done that is also a big confusion. Banks offering RML in India:- National Housing Bank (NHB) State Bank of India State Bank of Mysore IDBI Bank Indian Bank Union Bank UCO Bank United Bank of India Punjab National Bank Central bank of India Vijaya bank Barclays SWOT Analysis of RML:- Strengths: 1) It provides a regular income to senior citizens as per their choice. 2) The loan is provided without any income proof. 3) On the regular income any type of tax is not payable. 4) The property is valued by the bank maximum at an interval of 5 years 5) The borrower can continue staying in the house till the last breath.

9 6) After the borrower s death the heirs will be entitled to pay the loan amount with interest and get the possession on the house. Weakness: 1) Life expectancy at age of 60 is 18 yrs. whereas the cash inflow from RM is only 15 years. 2) On which basis the valuation of property is to be done is not clear. 3) Various fees payable in connection to the loan process increases the liability of the borrower. 4) After the approval of loan amount if the borrower wants to cancel it can be done within 3 days which is very less. Opportunities: 1) It s a substitute of social security for senior citizens. 2) Increase in nuclear families increases need of more cash inflow during old age to lead a pleasant life. 3) Number of eligible borrowers may increase in future because Indians always prefer to invest either in gold or in house property. Threats: 1) Property valuations are ambiguous. 2) Rate of interest is completely the discretion of lender. If the rate of interest increases it increases the burden of the borrower.

10 3) Lender has discretion to increase the loan amount on revaluation. 4) The lender can get the loan closed before the due date if the borrower fails to pay property tax or to maintain the house property. 5) If the loan amount including interest exceeds the realizable value of the property then the lender has rights to instruct the borrower to move out of the house and can sale it. Conclusion: Life is unpredictable at every step and this is why in order to face the future contingency. Many plans are available that gaze into the future and foresee financial stability during old age. The concept of reverse mortgage is also getting popular in India but still it has not got that popularity as it is in UK and other countries. Now in future it is expected that number of reverse mortgage loan cases will increase because of the modernization in the Indian society. To a certain extent the eligibility criterion is also responsible due to which it is not attracting people as it should be. One of the main reasons is obviously the unawareness of the plan, it is known only to the high class people or can say those who are having knowledge of finance but still many are in the darkness we need to keep them also informed. One way can be by organizing awareness week for the plan by various banks as they do for house loan, personal loan, debit & credit card. Still there is scope for customization according to Indian society and once it is done probably it can be a very popular source of finance in old age. Finally it can be concluded that Reverse Mortgage is a relatively new concept in India. It would take some time for a change in mind set of individuals to accept it. As a financial tool, Reverse Mortgage is ideal to augment a senior citizens income

11 in his years ahead. Despite all its shortcomings in India, it could make good the shortfall in ones pension or income to live a quality life ahead Reference: Websites: reverse-mortgage-loan/generalguidelines of-reverse-mortgage Reverse Mortgage-social implications Journals: - International journal of Banking, Risk & management volume & issue 1 Journal of accountancy July 2012 issue Research papers:- Reverse Mortgage Products: An Indian Banking Perspective - Saptarshi Ray, Arup Choudhuri Reverse mortgage An effective social security scheme for elderly- Kanchan Naidu & Neeta V Shah