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Just for sunset years

for a comfortable LIFE: Your house could come in handy after retirement

Old timers believed in the adage that a son is the best walking stick for an aging parent. With rising nuclear families in today’s society, this may no longer make any meaning, but with the need for being financially independent during one’s old age and the added sword of inflation staring at us, the increased life expectancy, although a boon, may yet be a bother when one has to strive hard for making financial arrangements.

Although much has been said about pension funds, there is no comprehensive social security system in our country to protect the elderly against economic deprivation. It is estimated that only 11 per cent of the working population is covered for pension schemes. Hence, apart from the self-employed, even the salaried may have to plan for their post-retirement financial needs.

However, with the introduction of reverse mortgage loan by major banks and Home Finance Companies (HFCs), there is light at the end of the tunnel. This scheme is a loan against your home that you do not have to pay back as long as you live in that house.

Reverse mortgage can be defined as a form of mortgage in which the lender makes periodic payments to the borrower using investment in the house property as security. It is a special type of loan offered to homeowners who are old, to enable them to convert the market value of their home into cash to finance their needs. The basic condition is that the property should be self acquired and self occupied. In a normal home loan, you avail a loan in lump sum and repay the same in monthly instalments (EMIs), which consist of principal loan amount and the interest charged. In the case of reverse mortgage, the bank or HFC will provide you loan in instalments (normally up to 180 months).

If you are 60 years and above and own a house without any encumbrance on it, you would become eligible to get reverse mortgage loan. The property can be in your name or may be jointly owned along with your spouse. The property should be sound and the expected life of the building should be at least 20 years and above. You need to offer the mortgage of the property as prime security to avail the loan. In addition, banks may seek a registered ‘Will’ from you and an affidavit clearly mentioning that during the pendency of the loan period you will not write one more ‘Will’; create any encumbrance on the property; and will not in any way dilute your right, title and interest in the property.

Let us analyse the example of Murthy, who has just retired from a private company where there is no pension provision. He has exhausted all his savings and liquidated his investments for his children’s education and marriage. The retirals in the form of Provident Fund and Gratuity run into a couple of lakh only. Till recently, he was a worried man pondering about his future without a regular income. Murthy had availed a home loan of Rs. 10 lakh to purchase a property worth Rs. 20 lakh, about 15 years ago, where he is living now. Last month he paid his last EMI of Rs. 10,150 and so has repaid the loan fully.

When Murthy read about ‘reverse mortgage’ in the newspapers, he decided to opt for the loan and approached the same bank where he had availed the home loan. The bank valued his property at Rs. 80 lakh and decided to take 75 per cent exposure of the property, i.e. Rs. 60 lakh. The bank offered him reverse mortgage at 12 per cent interest for a period of 15 years. The monthly instalment Murthy would be getting is Rs. 12,000. Thus, he is able to generate the required income to lead his life, without selling his property, and continue to stay in the house.

Since monthly instalments received under reverse mortgage are treated as loan (not as income), there is no income tax applicable on the same, irrespective of whatever amount is received.

The interest charged may be fixed for a period of 3-5 years and so the periodical payments made by the bank to the beneficiary under reverse mortgage (monthly instalments) may not change frequently. However, after the fixed period of 3-5 years, banks would be charging the prevailing interest rates then, resulting in lower payments when the interest rate increases and the amount paid will be increased if the interest rate has come down.

The bank has also informed Murthy that at the end of every three years, it is going to revalue the property and accordingly increase the monthly payments, if property value has indeed gone up. In all likelihood, property value may go up considerably and with inflation, Murthy may opt for seeking higher monthly payments. If, by chance, the property value comes down, the bank will be at liberty to decrease the monthly payment also. Murthy can opt for change of term in reverse mortgage, change in periodical payments, like bi-monthly or quarterly. He can also opt for lump sum for some urgent needs, within the allowed exposure of value of the property. He can also seek line of credit, which can be drawn in case of need.

If the loan seeker dies before the term, the spouse, if alive, will be allowed to continue to stay in the house to get the monthly instalments till the agreed term is over. If the spouse also dies before the term, the bank will contact the legal heirs of the borrower and give them the options of either a repay of the total outstanding loan, i.e. monthly instalments availed till date along with interest calculated at agreed terms, or the bank will sell the property, adjust the sale proceedings to the outstanding amount and return the balance amount to the legal heirs.

If the borrower and his spouse survive the term, they can extend the reverse mortgage by 5-10 years and continue to get revised monthly instalments based on the value of the property at the time.

The borrower will have the option to pre-close the deal by paying off the outstanding loan (total instalments availed plus the interest charged) with pre-closure charges.

Once the borrower decides to shift from his house under reverse mortgage, he has to repay the entire loan instalments availed along with interest and pre-closure charges, if any, because one of the basic conditions of reverse mortgage is that the property should be self-occupied. The lending bank or HFC may add insurance to reverse mortgage.

The premium will be deducted from the instalments payable to the borrower. The corpus accumulated at the end of reverse mortgage tenure will be used to fund the years that borrower outlives the loan tenure. Or, the borrower can keep a small portion of the monthly payments as recurring deposit, enabling him with good returns after the mortgage term.

During the mid 1980s, many elderly citizens were abandoned by their children and facing a financial crisis in the U.S. The houses they owned were called ‘dead assets’. To mitigate their financial instability, reverse mortgage was introduced. It became popular and by 2006, as many as 65,000 elderly citizens could avail themselves of the benefits. Although major banks and home finance companies in the country have announced the reverse mortgage product, in the absence of product guidelines, local branches of many banks are unable to go ahead with the scheme. However, Dewan Housing Finance, State Bank of India and IDBI have started accepting applications for the same, and soon LIC Housing Finance, HDFC, ICICI Bank and others may follow suit.

(The author is Director, Institute of Home Finance, Bangalore deshpanderp2007@gmail.com)

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