Updated Article on Reverse Mortgage Loan.

Reverse Mortgage Loan: M.V.Ruparelia.






Introduction:



Number of Senior Citizens in our country as well as the whole world is increasing day by day due to various factors like overall economic growth, low mortality, advancement of medical science etc. Such a huge number of experienced and talented think tanks of the society can not be ignored by any Government or Society! With a view to provide a steady stream of income to Senior Citizens owning residential premises, Finance Minister had announced the introduction of a novel Loan Facility called ``Reverse Mortgage Loan`` (RML)in his Budget Speech of 2007. Government owned National Housing Bank has notified detailed operating instructions for guidance of Primary Lending Institutes (PLI) viz Scheduled Banks and Housing Finance Corporations (HFCs). PLIs have been advised to observe and maintain high standards of conduct with Senior Citizens and their families and treat them with special care, fairness and sympathy. They are also advised to disclose and explain all terms of the loan clearly. They should give full details of methodology followed in valuation of Residential Premises, quantum of loan and all pros and cons of loan. They will also explain the details of Agreement to be entered into for Mortgage. As a customer-friendly gesture, even after loan is sanctioned and documents executed, borrowers shall be given 3 clear days time to cancel the transaction (Right of Rescission). Finance Ministry has further clarified that no Income Tax is payable on amounts received by neither Senior Citizens from Mortgaging Organization nor any capital gain is payable on higher assessed value of their flats given on mortgage. This Scheme has now become quite advantageous to Senior Citizens (Asset reach but Income poor) having their flats needing additional income. Let needing Senior Citizens take advantage of this Scheme and improve their standard of living.

Amongst the Banks, Punjab National Bank (PNB) was first to introduce its Loan Scheme named ``Bagban`` and amongst HFCs, Dewan Housing Finance Corporation Ltd (DHFL) was first to introduce its ``Saksham``. Thereafter almost all Banks & HFCs have notified their schemes from time to time.



Necessity:

Generally, Loan is not acceptable or advisable in our culture but culture not of our country but almost the entire World to-day is completely changed. Farmer takes loan for tractor, seeds etc to increase production. Citizens take loans for bikes, cars, T.V., Fridge, and House Building etc. Governments are taking loans for food grains to feed population, water supply schemes, roads, machinery, arms etc for welfare as well

as quick development of the country.

Due to abnormal increase in dearness, overall progress and easy availability of various things and facilities, it is difficult for many Senior Citizens to live comfortably within their present income. Many had not planned for such a long life span. There are Senior Citizens, who have some income out of pension or savings but not sufficient to meet all their basic needs. There are some, who have good income for basic needs but not sufficient for good health care facilities, picnics, pilgrimages, sight seeing or similar needs of better life. They are not able to spend much for social obligations like marriages of children etc. There are some, who have enough income to meet such needs but not sufficient for fulfillment of their childhood desires, fancies and fantasies like visits to Far-East, Alps, Switzerland, Europe, America or a flat TV, costly Mobile and similar desires! Almost all Senior Citizens have worked hard during their prime time and spent their hard earnings for family and social obligations etc and hardly anything on self. Many have saved and/or taken loan for providing Residential Premises and take pride of having such premises. They are staying in such self acquired premises for quite some time and have personal attachment to that place. Their children do not require these premises or anything from them, being well off and staying independently and want their parents to enjoy and live comfortably. Senior Citizens do not wish to sell off and go to smaller premises or native place, even when they need more income. The price of their property has increased considerably, as compared to their purchase price and it has become their `Home –Equity Wealth`. This Reverse Mortgage Scheme is to help all such Senior Citizens to augment their income and empower them to enjoy the fruits of the booming economic progress of the country in their last spell of life and to live decent life, if not King-size, at least quite comfortably. Flat is procured by them with their own efforts & earning. Parents do not want to give them to their children for some reasons or this is not required by their children, as they are well-off or away. Flat or any material things can not be taken with us on our death. It is for staying and under this scheme, staying till death of both is guaranteed, so why not encash and enjoy our last spell of life with better financial resources available to us now due to our past efforts.



Scheme:

Under this Scheme, any Senior Citizen of 60 years and above, resident of India, having a self-acquired and self-occupied Residential Premises having residual life of at least 20 years and without any encumbrances and in which he is staying at present for one year or more can mortgage the premises to any PLI of his choice. Married couple will be eligible as joint borrowers. In such cases, only one of the borrowers need be 60 and above and another 55 and above. One great advantage for borrowers is that there is no service of loan during their life time/tenor i.e. no pay-backs.



Amount of Loan:

The amount of Loan by P.L.I. shall depend upon realizable market value of residential premises assessed by P.L.I., age of borrowers and prevalent rate of interest. According to guide lines of N.H.B., the loan amount along with interest on the basis of Reverse Annuity Mortgage that will accrue till the end of tenor of loan may generally be limited as under:-

Age Group Loan amount to be limited to Assessed Value of Residential Property.

60-65 40%

66-70 50%

71-75 55%

Above 75 60%

As these are guide lines only, P.L.I.s follows their own standards. e.g. Punjab Nation Bank is keeping margin of 20% and has kept the upper limit of loan with accrued interest as 1crore. Rate of interest by P.N.B. is 10% ; by D.H.F.L. 12%and Indian Bank 10% by keeping uniform margin of 61% in all cases for 15 years tenor and loan to asset value 39%. The methodology adopted by each P.L.I. for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions, if any, shall be clearly disclosed to the borrowers. The valuation of property shall be reassessed at some intervals but at least once in 5 years and amount of loan shall be revised upward or downward as per revaluation. P.N.B. has fixed 5 years, D.H.F.L. & Indian Bank as 3 years for revaluation. Borrowers shall have full liberty to accept or reject the revaluation by paying the amount due at that time to P.L.I. All P.L.I.s have to ensure that the equity of borrower in residential premises (Equity to Value Ratio-EVR) does not at any time during the tenor of loan fall below 10%. The following tables of P.N.B. and Indian Bank shall give an idea as to what amount of loan per month may be available for different tenors of loan per 1 lakh of value of residential property:-

Tenor-years 10 11 12 13 14 15 16 17 18 19 20

Amount Rs. 490 420 360 315 275 240 215 190 170 150 135 P.N.B.

216 I.B.

410 DHLF.

468 225 S.B.I.



461 393 337 291 252 220 Allahabad Bank

As per DHLF rates, a property worth Rs. 20 lakhs for instance will earn Rs. 4100 per month for 10 years. After adding up interest at 12 %, the amount payable to DHFL would be around Rs. 10 lakhs.



Nature of Payment:

The loan shall be payable in one or more installments in lump sum or monthly, quarterly, half yearly or annual installments, as may be mutually decided by borrowers & P.L.I.s. It can also be paid by way of committed line of credit. Lump sum payments may be made conditional and limited to special requirements such as medical emergencies, home improvements, maintenance, upgradation, renovation, extension, insurance of residential premises. This can be used even for repayment of existing loan taken for the residential property to be mortgaged and any other genuine needs of borrowers. This loan is to supplement the existing income, if any, but can not be used for any speculative, trading or business purposes. The loan-amount shall generally be paid to borrowers directly except where payments are required to be made to outside parties for repairs, maintenance, insurance, property tax, repayment of loan of residential premises to be mortgaged etc. The Loan shall be secured by way of equitable mortgage of self-acquired & self-occupied residential property in favour of P.L.I. in suitable form/agreement. The PLI shall enter into a detailed loan Agreement setting out all salient features of loan mortgage security. No Income Tax is payable on amounts received by Senior Citizens from Mortgaging Organization nor any capital gain is payable on higher assessed value of their flats given on mortgage.



Initial Cost:

The P.L.I.s will provide in writing a fair and complete package of RML material and specimen documents covering the benefits and obligations of the product. They shall also make available interest rate and details of capitalization of interest on loan etc. The initial costs (closing costs) may include the customary and reasonable fees and charges for Origination, Appraisal, Inspection & verification, Title Examination Fees, Legal Charges/Fees, Stamp Duty, Registration charges, Property Survey & Valuation charges. A detailed schedule of all such charges shall be provided to prospective borrowers by PLIs.



Settlement Of Loan:

The loan shall become due and payable only when the last surviving borrower dies or would like to sell the premises or permanently moves out of home to stay with some relatives or some institute of aged care home. If the borrowers do not live in the premises continuously for one year or more or do not intend to live there continuously, it shall be treated as moving out permanently. Settlement of loan along with accumulated interest shall be met with by proceeds received out of sale of mortgaged property. The balance surplus, if any, shall be passed on to borrowers or their heirs/estate. The borrowers or their heirs can repay the amount due from any other source and get back the mortgaged property. They can also prepay the loan and interest at any time during the loan tenor also without any levy/penalty/charge for such prepayment. The borrowers shall be allowed to continue to stay in the premises till they are alive or cease to use the property as their residence. Even in cases, where, due to accrual of interest till death of both Senior Citizens i.e. self & spouse, total amount due to the Mortgagee Organization exceeds the value of the mortgaged flat, no amount shall be payable from other property of the borrowing Senior Citizens or their kith & kin!

Obligations of borrowers:

i) Borrowers must continuously live in the mortgaged premises and not leave that for continuous 1 year or more and keep the premises in proper livable and saleable condition, keep them insured against fire, earthquake and other calamities.

ii) Continue to pay all taxes, maintenance charges, insurance, repairs & maintenance etc.

iii) Will not give away the premises on rent or by way of donation or gift or create in detail encumbrances etc or will not abandon or make any changes, which may affect the security of the premises.

iv) If the premises are declared by the government etc authorities as not fit for residence due to health or safety reasons or they desire to acquire for public purposes, the PLIs shall be

v) notified immediately.

vi) Borrowers shall not make any testamentary disposition of premises and if it is done, it would be subject to the mortgage created in favour of PLI. Will must clearly indicate that this property is subject to the discharge of the mortgage debt and heirs shall not be entitled to challenge the validity of the mortgage. PLIs may obtain a registered will in its favour stating that the borrowers have availed of RML from PLI on security by way of mortgage.

vii) Permit PLI to enter the premises for inspection, as and when necessary.

The above is only to give some idea about the new facility offered. Before applying for RML, each Senior Citizen should assess his needs, make a reasonable assessment of life expectancy and life style and approach the PLI of his choice and discuss with PLI in detail, obtain detailed scheme and then take his decision. In these 3 years, about 6400 Senior Citizens have taken advantage of this scheme and received loan to the extant of Rs 1200 crores. Looking to the poor response, perhaps due to limited period of monthly payments, a New Reverse Mortgage Loan enabled Annuity Scheme has been introduced by Central Bank of India in Dec.99.

New Reverse Mortgage Loan enabled Annuity Scheme:



Under new Reverse Mortgage Loan enabled Annuity (RMLeA), 2009, Central Bank of India & Star Union Dai-ichi Life Insurance Co. Ltd. have launched an Annuity Product called Cent Swabhiman Plus on

10-12-09, a Reverse Mortgage Loan enabled Annuity (RMLeA) - a unique & tailor-made product facilitating Senior Citizens to avail regular payments throughout life till both die, as against 10/15/20 years by RML Schemes and that too with substantially higher payments than other Schemes. Rate of interest charged is 9.5 (to be reset every 2 years) in place of 10 to 12% in RML Schemes. The amount of loan shall depend on market value of your flat (property), your age & prevalent rate of interest. For those aged 60 to 70 years, 60% of value of property, those between 70 to 80, 70% of value & for those, who are 80 & above, 75% of value of property will be the amount of loan admissible. Such admissible property value (to be revalued every 3 years) is considered for giving annuity, which can be taken at 25% ( subject to limit of Rs 15 lakhs) as lump sum and remaining or full amount in monthly, quarterly, annually etc, as desired by borrower. The borrower should be of 60 & above and spouse 55 & above. Payment will be made by Insurance Company through Central Bank. Borrowers have to deal with Central Bank only as One-Point Contact for all matters. There are 2 schemes, one without return of Purchase price and another with return of Purchase price. In the scheme of repurchase of the mortgaged property by heirs, monthly payment will be little less. Monthly payment per lakh works out to Rs. 396 in first scheme & Rs 288 p.m. in second scheme. Service charge of 1.5 % is levied. Income Tax, as per borrower’s taxable position is payable on annuity payments. Capital Gain is payable only at the point of alienation of mortgaged property by the mortgagee for the purpose of recovering loan. National Housing Bank is already in correspondence with Finance Ministry for exempting this Scheme also from Income Tax & Capital Gain. It is very important to note that the whole RMLeA scheme is a `No Negative Equity` scheme and the borrower will never owe more than the net realizable value of the mortgaged property. Even when payments with interest to borrower exceed Net Realizable Value of property, it will not be recovered from the borrower or his heirs from any other asset or will not be asked to pay that excess. Borrower can prepay an RMLeA availed at any time during the loan tenure without any levy of prepayment charges from Bank. On such repayment, Mortgage will be released by Bank with an advantage of annuity payments by Insurance Company continuing in his Bank account. On death of borrower, surviving spouse (joint borrower) is given little higher payment. All other conditions of RML Scheme mentioned in earlier portion remain the same for RMLeA Scheme also.