Let your home solve your cash problems

ANAND KALYANARAMAN 

- The Hindu 

- Business Line




Reverse mortgage loans enable senior citizens to receive regular cash flows from their residential property — even while they continue to live in their house.

These days many senior citizens are faced with a difficult situation.

On the one hand, the value of the house they own and live in has appreciated significantly but they are not inclined to sell it. On the other, they do not have adequate income to meet daily expenses, and do not want to be financially dependent on children or relatives.

Reverse mortgage loans can come in quite handy for such senior citizens. It is the opposite of normal home mortgage loans which entail regular cash outflows (EMIs) by the borrower.

Reverse mortgage loans, on the contrary, enable senior citizen borrowers to receive regular cash inflows from their residential property. This, even while they continue to live in their houses.

The reverse mortgage lender will decide the amount of loan you can raise based on various factors.

This includes the value of the property, the loan-to-value ratio (usually in the 60-80 per cent range), interest rate (fixed or floating), your age and the plan chosen.

Payments can be lumpsum (up to Rs 15 lakh for medical treatment), periodic (monthly/quarterly/half-yearly/annually), through a committed line of credit, or a combination of the above. The higher your age, the greater is the periodic amount you receive.

While the property is mortgaged to the lender, you remain the owner and need not repay the loan till you live.

After your demise, your legal heirs can choose to repay the loan and gain ownership rights to the property. Else, the lender sells the property, adjusts the sale proceeds towards the loan, and returns any excess amount to the legal heirs. Also, you can choose to prepay the loan during the loan tenor without pre-payment penalty.

Reverse mortgage schemes also have ‘no negative equity guarantee'.

This means that you will not be asked to make up for any shortfall if proceeds from the property sale do not cover the outstanding loan.

The reverse mortgage loan scheme, popular in countries such as the US, was introduced in India in 2007-08. It has since undergone changes in terms of favourable tax-treatment (in some product variants) and life-time annuity payment (in others). (See story below)

The regulator National Housing Bank (NHB) has prescribed guidelines to safeguard senior citizens. But adoption of the schemes has been quite low in the country.

There are many reasons for this — the culture of bequeathing property to children, emotional resistance to mortgage the hard-built house, and inadequate publicity to the schemes. Besides, the new scheme with a life-long payment assurance has an unfavourable tax-treatment and does have not enough players.

But adoption of the reverse mortgage option may increase in the coming years, with the growing trend of nuclear families, increasing longevity and rising expenditure. We examine some key conditions, and pros and cons which senior citizens should consider before going in for reverse mortgage.

Eligibility: You should be at least 60 years old. Married couples are also eligible as joint borrowers provided one spouse is aged at least 60 and the other at least 55. Your income level is not a constraint.

Property: The property must have clear title and be free from third-party liability. You must use the property as permanent primary residence — it must be a self-acquired, self-occupied residential property where you spend the majority of your time. This implies that you will not be eligible for reverse mortgage on inherited property, or on houses in which you do not normally reside. Other conditions include that the property must have at least 20 years of residual life.

Use of funds: You can use the funds received for many purposes such as improvement and renovation of house, medical needs, living expenses and other consumption needs.

But using the proceeds for speculative, trading and business purposes is not allowed. This means that investing in shares, real-estate, etc, is not allowed.

Expenses: You will have to incur processing and other charges towards the reverse mortgage loan. This could be 0.25-0.5 per cent of the loan amount to half a month's loan instalment.

Besides, you will have to bear ongoing expenditure such as insurance charges, taxes, maintenance and statutory payments towards the home.

Revaluation of property: The lender will revalue the property at least once in five years. The loan quantum could either increase or decrease on such revaluation. An increase in the valuation could improve your periodic returns, while a decrease could depress them.

Loan Foreclosure: A reverse mortgage loan becomes payable only when the last surviving borrower dies or permanently moves out of the house. A permanent move is when neither you nor your co-borrower has lived in the house continuously for one year. But the loan may be foreclosed in case of certain events of default. For example, if you are declared bankrupt, or are guilty of fraud or misrepresentation. Other trigger points include non-payment of taxes, or if the property is donated, rented out, or not maintained and insured. Adding a new owner to the title or creating third party liability by way of debt, etc, will also make the loan liable to foreclosure. In essence, there are restrictive rules regarding use and upkeep of the property. If the reverse mortgage is foreclosed, the lender will stop making payments.