A financial product for senior citizens

The reverse mortgage scheme launched in the Indian market last year is a great product for senior citizens but needs to be promoted well by the banks and the government to gain impetus and acceptance. It will be a boon to the whole industry and a value added to all parties involved if followed properly. The product is an effort to give a better life to effort to give a better life to senior citizens at a later stage in their life. It would not only enable senior citizens to earn an income from their property, at a time when they have no eligibility criteria or a loan, but also serve as safeguard against being ousted from their homes by their family members or legal heirs, since the property would be mortgaged to the bank or the institution which would be giving loan on the property. This product would thus serve dual purpose.

Reverse mortgage has been successfully implemented in countries like the United States, UK and Australia. However, being a new concept the schemes are yet to gain momentum in the Indian market. Leading players in the banking industry like State Bank of India Punjab National Bank, Bank of Baroda as well as HFCs like LIC Housing Finance, are in the forefront selling this scheme as they need to have diversified products catering to all citizens.

In this scheme a house owner who has crossed 60 years of age can seek a loan of up to 60 percent of the value of residential property by mortgaging his/her house for the maximum period of 15 years, with a bank/HDF while retaining the right to stay in the property. The house owner is not required to pay back the loan amount till he dies or moves out of his house.

It is a wonderful product for senior citizens. The idea is the property should come to their use when they really need it during their advanced years.

The key features of the scheme as elaborated in the draft released by the National Housing Bank, a subsidiary of the Reserve Bank of India are – the borrower has the right to decide how he wants to receive the money, as one huge lump sum or in monthly installments. A revaluation of the property has to be undertaken by the bank/HFC once every five years and necessary changes made to the loan amount. The Bank / HDF will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgage residential property permanently. Any excess amount will be remitted back to the borrower or his heirs. Before resorting to sale of the house, however preference will be given to the owner or his heirs to repay the loan amount along with the interest and to get the mortgaged property released.

The borrower can use the loan amount for various purposes for some medical emergency, to get rid of unresolved debts, for renovation and extension of his property, maintenance and insurance of the house or to upgrade his lifestyle.

Despite NHB having issued a memo on the operational guidelines of the product, not any bank have understood the product properly. The product has also not caught on due to lack of proper publicity and the documents required where in senior citizens have to submit documents establishing their ownership of the property. In some cases there may be part of the children. The product though attractive, has found only a few makers since its launch 13-14 months back. Only 240 cases of reverse mortgage have been reported so far.

There was low demand for Reverse Mortgage due to lack of clarity on the tax treatment. The amendments proposed in the budget are a welcome move wherein a Reverse Mortgage (RM) will not be regarded as a transfer of capital asset and therefore not attract capital gains tax. The loan amount will also be exempt from income tax for the borrower.

Senior sources from Punjab National Bank said there are no issues with the product. Following the clarification on the tax element in the budget there has been good response. The scheme is meant to give cash flow to senior citizens and the interest is built into the EMI given every month. Both the principal and the interest are recovered only after the death pf the senior citizen. If the legal heirs do not come forward within six months time to repay the amount, the Bank will sell the house and the proceeds after liquidating the amount of the loan, will go to the legal heirs.

There is a need for clearer guide lines for safeguarding the interests of senor citizens. The IL & FS Trust Company is looking to assuming the role of a third party facilitator, who would be a neutral entity and ensure there is fair play involved and senior citizens are not left to the mercy of the bank. Towards this, the company is also engaged in conducting seminars to explain to senior citizens the various aspects of reverse mortgage. Once awareness is rated, there will be more makers for the product.