What is a reverse mortgage?
In simple terms, reverse mortgage is a loan against your home that you do not have to re-pay as long as you live in that place. Sounds interesting!
In para No 89 of the Union Budget Speech 2007-08, Finance Minister proposed that 'National Housing Bank' (NHB) will shortly introduce a novel financial 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 loan. The NHB has come up with draft operational guidelines for the same to banks in March 2007. www.economictimes.com has put together the salient features of the reverse mortgage loan (RML) that can be availed by senior citizens.
What is the difference between RML and a bank home equity loan?
With a traditional second mortgage or home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan. And, you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income.
The amount you can borrow depends on your age, the current interest rate and the appraised value of your home. General principle: more valuable your home is, the older you are; the lower would be the interest rate and you can borrow more. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities including water, electricity etc.
Why does one need this loan?
There are many senior citizens in India who do not have any liquid funds but own a good residential property. Here, one's property becomes a source of income for senior citizens. The person can invest for retirement and also enjoy benefit of capital appreciation of the secured investment i.e. housing property. They are not under pressure to repay the loan in their lifetime. On the person's death or his/her leaving the house permanently, the loan is repaid along with accumulated interest, through sale of the house.
It can also be an investment tool for youngsters who plan for a retirement solution. They can start investing in a housing property and take benefit of the same during their retired life. They have a secured investment which has benefit of capital appreciation.
What is the difference in the Indian and Western models of reverse mortgage loans?
The concept is same in both Indian and Western RMLs. However, the RML is a relatively mature product in developed markets like USA, UK, Australia, Canada etc. Reverse mortgages in these countries have more variants like insurance coverage for the lender and the borrower. In the US, RML is a federally-insured private loan that is safe and provides financial security to the older Americans. Those availing the MRL in US are counseled before the loan is actually disbursed. US Department of Housing and Urban Development provides all the information relating to RML.
"We have no doubt that our product would also evolve into a mature instrument addressing the needs of the senior citizens in India who cannot avail the home loans," says V K Badami, Deputy General Manager, National Housing Bank.
What is the eligibility criterion for availing this loan?
There are few requirements for this loan. A borrower should be a Senior Citizen of India above 60 years of age. He or she should be the owner of a residential property (house or flat) located in India, with clear title indicating the prospective borrower's ownership of the property and they should be using that residential property as permanent primary residence. A married couple will be eligible as joint borrowers for financial assistance provided both are above age of 60 years.
How much money can one get from the RML?
The amount of loan will depend on market value of residential property, as assessed by the Primary Lending Institutions (PLIs) namely scheduled banks and Housing Finance Companies (HFCs); age of borrower and prevalent interest rates.
What will be the nature of the payment? Can one get lump-sum during an emergency?
The mode of payment will be decided mutually by the PLIs and the person borrowing the money prior to dispersal of funds. The loan may be extended as regular monthly, quarterly, half-yearly or annual periodic cash advances. Alternatively, a line of credit would be available to be drawn from when required or in lump-sum payments in one or more tranches, depending on the agreement.
What are the guiding norms for PLIs to assess the value of property, fixing loan rates? Is there transparency in this process? Who keeps a check on the lender (banks/ housing finance companies)?
"PLIs will have to clearly explain to the prospective borrowers the terms and conditions of RML including the fixation & calculation of interest, the methodology of the valuation / revaluation process and the frequency/schedule of such revaluations upfront," adds Badami.
The PLI will have to re-value the property mortgaged to them at least once every five years, the quantum of loan may undergo revisions based on such re-valuation of property at the discretion of the lender.
During re-valuation, if one is not satisfied with the interest rate what can he/she do? Will one have to return the money and interest they have received till then?
The borrower will have the option to accept such revised terms and conditions for furtherance of the loan. If the borrower does not accept the revised terms, no further payments will be effected by the lender. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged-care to an institution or to relatives.
What will happen if the liability (principal plus interest) exceeds the value of property during the term of the plan?
The PLIs will have to ensure that all reverse mortgage loan products carry a clear and transparent 'no negative equity' or 'non-recourse' guarantee, that is, the borrower will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.
Can the lender take away one's home if he or she outlives the loan?
No! One need not repay the loan as long as one of the borrowers continues to live in the house and keeps the taxes and insurance payments update. Presently, the maximum loan disbursement tenure has been limited to 15 years.
Will the legal heir have any right to the house?
The borrower and their heir can repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.
Private housing finance company, Dewan Housing Finance Corporation Limited(DHFL) launched the RML scheme, 'Saksham' in India in Sept 2006. It has not met with much success. Punjab National Bank has one such scheme, 'PNB Baghban'.
Badami says, "We have been informed by DHFL that they have not actually extended RML in 2006. At that time, NHB's draft operational guidelines were not issued. It is expected that after NHB's guidelines are finalized taking into account feedback received people, the Scheme will be implemented by many other banks and HFCs."