Most people are unwilling to consider the first option, as a house is an asset that is acquired for generations to enjoy. It also becomes difficult to shift to a new location after retirement. And living with children is not something most modern-day retirees want to do, as it means compromising on their independence. Also with nuclear families and jet-set lifestyles becoming the norm, many people find it hard to devote time to their parents. Mushrooming of old age homes across the country attests this trend.
"These days the urban male in India typically lives up to the age of 82," says S Sridhar, chairman and managing director, National Housing Bank. Considering that the retirement age in India is 58, one typically lives 24 years after retirement. With rising inflation, it becomes difficult to fund these years by investing in traditional instruments. The elderly cannot afford to invest their hard-earned money in riskier instruments, which offer higher returns than traditional instruments, at this stage of their life. So what can the elderly in India do to fund their retirement years? The answer can be found in the West, specifically in the US, where the concept of reverse mortgage is hugely popular among the newly retired. Essentially, a reverse mortgage is a loan against your home that you do not have to pay back for as long as you live in that house.
Recently, NHB has come up with a reverse mortgage plan, which promises to be a boon for the elderly if it becomes a reality. Outlook Money takes a look at the concept of reverse mortgage and how it will help the elderly to fund their retirement years."According to surveys that we have conducted, we feel that there is a need for a product like this for the elderly. Providing such a product is also in line with NHB's broad objective of providing long-term housing finance to the un-served and the under-served sections of society," says Sridhar.
"If you take a look at an individual's balance sheet, you will find that house is the single-largest asset," says Gaurav Mashruwala, Mumbai-based financial planner. In your working life, when you buy a house on loan, with every equated monthly installment that you pay, your equity in the house increases. When you pay up your entire loan, your equity in your house is 100 per cent. In reverse mortgage, you do the opposite.
The concept of reverse mortgage seeks to enable house-owning senior citizens to meet their expenses without selling their house.Reverse mortgage is so named because the payment stream is reversed, that is instead of the borrower making monthly payments to the lender (as in a conventional mortgage), a lender makes payments to the borrower. As per NHB's proposed scheme, the loan amount shall be extended as regular monthly or periodic cash advances or as a line of credit to be drawn at the time of need. "In case you want a line of credit, then you will be required to pay a commitment fee," says Sridhar. Lump sum withdrawal of loan shall be permitted for restricted uses such as for upgradation, renovation and extension of residential property.
Under the present recommendations of the NHB, you need to be 62 years of age and the tenure of the loan are fixed at 15 years. "There have been recommendations to lower the age to 60 as people generally retire at that age. The primary lenders shall however have the discretion to consider a shorter/longer tenure," says Sridhar.
However, if you outlive the tenure of the loan, you will not be asked to move out of the house. Although payments made to you will stop after 15 years, the interest will keep accumulating till the accounts are finally settled.
There is talk of adding insurance to reverse mortgage. So the premium for that will be deducted from the payment made to you. The corpus accumulated at the end of 15 years will be used to fund the years that you outlive the loan tenure. There are also suggestions that a certain portion from the payments be parked in bank fixed deposits to fund the years that you outlive the loan. The accounts will be settled by the HFC only after your death or if you vacate the property.
The settlement of the outstanding loan amount, along with the accumulated interest, will be met by the proceeds of the sale. In the event of your death, your spouse can continue to occupy the property until his/her demise, and he/she generally made a co-borrower.
Supposing you pledge your property for reverse mortgage and midway through the tenure, you receive money either by sale of some investments or your children provide you money to pay the amount and the interest you owe to the bank, you can free your property. You can also pledge the same property for reverse mortgage in future, if you are in need of cash.
Apart from interest on the loan, you will have to bear other costs as well. These include closing costs of the primary lenders such as loan processing charges, documentation costs and commitment fees on undrawn loan amount. Adds Veer Sardesai, Pune-based financial planner: "Generally costs that the consumer bears are charges similar to that of a normal mortgage in addition to an origination fee and an inspection and appraisal fee."
In the absence of provisions for social security in the country, a product like reverse mortgage has numerous benefits. You will be not be financially dependent on anyone. The loan that you receive is not serviced during your lifetime.
While you unlock the value of your house, you continue to live in that property. Reverse mortgage enables fund inflows when income sources are generally restricted and tend to fall markedly as compared to your working life.
With reverse mortgage expected to become a reality soon, it makes sense to buy a house early in your working life so that you can unlock its value in your retirement years. Reverse mortgage however, does not strictly compare with other investment options like mutual funds, post office schemes and bank FDs.
The overriding objective of reverse mortgage is to address the financial needs of the house-owning, asset-rich but cash needy senior citizens as a significant option. Reverse mortgage is not in substitution of other avenues of funding one's post-retirement years.
NHB is working towards speedy introduction of this concept. As the apex financial institution for housing in the country, NHB has designed the product on ready-to-deliver mode based on specific needs of the asset-rich but cash-poor senior citizens.
It will endeavor to popularize reverse mortgage as one of an array of post-retirement financing options. NHB will not provide retail loans but it can refinance reverse mortgage to banks and HFCs. And in the event of a borrower seeking additional assurance that the bank/HFC will continue to provide payments under reverse mortgage for the contracted period, NHB can guarantee such obligations.
Since the concept of reverse mortgage is new in India, there are a number of issues that may arise and need to be addressed by the authorities for ensuring its successful implementation. These issues mainly pertain to tax-treatment, accounting, legal and regulatory aspects. "With the support of the government and the regulatory bodies, we hope to be able to launch the product as soon as possible," says Sridhar.
The rules might need a few modifications to ensure smooth operation of the scheme. One clause that is likely to draw a lot of criticism is the one that fixes the maximum loan tenure at 15 years. The NHB will need to address the concern of borrowers over their predicament if they outlive the credit period. At present, the rules say that a borrower's supply of income will be severed if he survives the loan tenure. However, he can continue to live in the house till his/her demise. The response to the product will be affected if this state of affairs persists.
Reverse mortgage enthusiasts are awaiting the NHB's final guidelines. Says S. K. Mitter, director and chief executive, LIC Housing Finance: "We would be interested in launching the product as soon as the guidelines become clear. There is a very good market in India -- there is a big segment in Tier-II and Tier-III cities and semi-urban areas waiting to be tapped."
The initial ride of the idea is expected to be slow and bumpy. Unlike in the West, joint families are still prevalent in many parts of India, although their number has shrunk. In many cases, the culture of joint families persists even after nuclearisation. In this scenario, many parents would still prefer to bequeath their house to their children rather than live off it.
More significantly, as Roongta says, "It's a product that requires a great degree of regulation and transparency, both of which are missing in India."The rough ride that the idea is expected to have, at least initially, is borne out by the way people have reacted to Saksham, a reverse mortgage product launched by Mumbai-based Dewan Housing and Finance Corporation Ltd (DHFCL) in September 2006. The company has received close to 200 enquiries from major cities in India about Saksham, but no one has signed up for it yet. Enquirers back out because the guidelines for reverse mortgage are not final.Says Kapil Wadhwan, managing director and vice-chairman, DHFCL, "The absence of a clear-cut legal framework is creating difficulties for us."The Kerala State Co-operative Bank recently announced its decision to introduce the reverse mortgage scheme. The bank says that it is waiting for the NHB to announce the final norms.
Under the existing regulatory regime, banks come under the RBI and HFCs under the NHB. Sridhar points out that the recommendations of the regulator are only advisory in nature. The NHB plans to provide guarantee to borrowers against default by lenders by starting a loan mortgage company. The company would also safeguard the interest of lenders in case borrowers bungle on the terms of the agreement.The extent to which the potential of reverse mortgage gets realized in India will depend a lot on the guidelines that will govern it. Much will also depend on how Indian society takes to it. But there is no doubt that it can lend dignity and peace of mind to elders by opening a financial lifeline for them. Watch this space.
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