(I would like to credit the idea for this topic to my friend Khyati Dedhia.)
A mortgage, as everyone knows, is a secured loan with land /property/building(normally houses) as collateral. The collateral over here is referred to as real property(Wikipedia describes it as land and any human improvements made on it). The loans taken are then paid over a specified period of time, normally in installments.
However, the same concept has been applied in a different manner for quite some time now,especially in the United States, to help senior citizens, with no or less income, to obtain financial security in their old age. This concept is called reverse mortgage and this facility was made available in India from 2007, through the Finance Minister's annual budget speech.
The whole process of reverse mortgage can be described as follows:
A senior citizen (usually above 60 years of age) can mortgage his house/property with a banking or a housing finance company for a fixed payment every month/quarter/half year/year. So unlike a normal mortgage where you are expected to pay a monthly EMI to repay your loan, here the bank gives you the loan in installments. So in short, rather than give you a loan in one go, the bank/finance company divides the loan into parts (as decided by you) and pays you the money so that you can have a steady source of income during your years of infirmity. Other advantages of this scheme include the provision to stay in the house till you die or move away . The loan can even be taken jointly with your spouse , if she is more than 58 years of age at the time of taking the loan. Even after one spouse dies, the other one can continue living in the house.
Repayment of the loan can happen when the loan borrower dies. In the case the bank has two options: ask the legal heirs to repay the loan amount and take back the property or sell the house, use the proceeds to recover the loan amount and then give the excess money back to the heirs. The recovered loan amount includes the principal , interest and other expenses as stipulated by the bank.
Revaluation of the property has to be done every 5 years to account for any appreciation in price of the property. This can hen be adjusted in the monthly payments in case of an appreciation/depreciation in the house price. Also, the loan amount is not treated as an income and hence the loan amount is not subject to taxation.
There are some restrictions on this scheme though. The person has to be necessarily over 60 years of age to be eligible for this scheme. The loan amount was earlier for a maximum of 15 /20 years (though the National Housing Bank has increased it to a lifetime of payments). Though the RBI has stated the loan amount to be a maximum of 60% of the property value, banks have placed a cap on the loan amount given (normally Rs. 50 lakhs).
How has this scheme fared in India?
The social conditions in India make it difficult for this financial product (which has enjoyed a successful run so far in the US) to succeed here. Firstly, as with all good financial option (like the New Pension Scheme), general awareness about this product is low. So, the project is not a runaway success like in the US.
Also, the social mindset in India dictates that being in debt of any kind is not good. We are, by default, a risk-averse country and would not want the burden of a loan at the fag end of our lives. Also, passing on the loan to our heirs is not something that many parents will want to do.
Without enough awareness, people won't want to mortgage property (in many cases, their only possession of immense value). Also the general tendency of mistrust at such an age is common in our nation, thus keeping the utilization of this scheme at a low. Another possible problem is the attachment to their property, which maybe ancestral/inherited.
A cap on the amount that can obtained in lieu of the property is something that is unfair. Ideally, the property valuation should yield the amount that should be given.
But what can also help the initiative succeed is the general self-respect of people in many parts of the country. People normally wish to live off their own money and this will give old people a chance to fund their own expenses rather than ask their children for money. Also, in this era, where children are too busy to take care of their old parents, this incentive will help prevent senior citizens from being dumped into old age homes.
Banks in India offering this scheme
The National Housing Bank (NHB), the State Bank of India (SBI), Central Bank of India, Punjab National Bank and some others (about 23 banks in all, according to a recent report in Business Standard) currently offer this financial product. According to NHB, as of March 31, 2010, around 7,000 RMLs of Rs 1,400 crore have been sanctioned (as per the same Business Standard report). A conference was held recently under the aegis of NHB on their lifetime reverse mortgage loan scheme, which was part of their promotional strategy to make people aware of this product.These initiatives will hopefully help in convincing senior citizens, in dire conditions, of this lifeline post retirement.
A mortgage, as everyone knows, is a secured loan with land /property/building(normally houses) as collateral. The collateral over here is referred to as real property(Wikipedia describes it as land and any human improvements made on it). The loans taken are then paid over a specified period of time, normally in installments.
However, the same concept has been applied in a different manner for quite some time now,especially in the United States, to help senior citizens, with no or less income, to obtain financial security in their old age. This concept is called reverse mortgage and this facility was made available in India from 2007, through the Finance Minister's annual budget speech.
The whole process of reverse mortgage can be described as follows:
A senior citizen (usually above 60 years of age) can mortgage his house/property with a banking or a housing finance company for a fixed payment every month/quarter/half year/year. So unlike a normal mortgage where you are expected to pay a monthly EMI to repay your loan, here the bank gives you the loan in installments. So in short, rather than give you a loan in one go, the bank/finance company divides the loan into parts (as decided by you) and pays you the money so that you can have a steady source of income during your years of infirmity. Other advantages of this scheme include the provision to stay in the house till you die or move away . The loan can even be taken jointly with your spouse , if she is more than 58 years of age at the time of taking the loan. Even after one spouse dies, the other one can continue living in the house.
Repayment of the loan can happen when the loan borrower dies. In the case the bank has two options: ask the legal heirs to repay the loan amount and take back the property or sell the house, use the proceeds to recover the loan amount and then give the excess money back to the heirs. The recovered loan amount includes the principal , interest and other expenses as stipulated by the bank.
Revaluation of the property has to be done every 5 years to account for any appreciation in price of the property. This can hen be adjusted in the monthly payments in case of an appreciation/depreciation in the house price. Also, the loan amount is not treated as an income and hence the loan amount is not subject to taxation.
There are some restrictions on this scheme though. The person has to be necessarily over 60 years of age to be eligible for this scheme. The loan amount was earlier for a maximum of 15 /20 years (though the National Housing Bank has increased it to a lifetime of payments). Though the RBI has stated the loan amount to be a maximum of 60% of the property value, banks have placed a cap on the loan amount given (normally Rs. 50 lakhs).
How has this scheme fared in India?
The social conditions in India make it difficult for this financial product (which has enjoyed a successful run so far in the US) to succeed here. Firstly, as with all good financial option (like the New Pension Scheme), general awareness about this product is low. So, the project is not a runaway success like in the US.
Also, the social mindset in India dictates that being in debt of any kind is not good. We are, by default, a risk-averse country and would not want the burden of a loan at the fag end of our lives. Also, passing on the loan to our heirs is not something that many parents will want to do.
Without enough awareness, people won't want to mortgage property (in many cases, their only possession of immense value). Also the general tendency of mistrust at such an age is common in our nation, thus keeping the utilization of this scheme at a low. Another possible problem is the attachment to their property, which maybe ancestral/inherited.
A cap on the amount that can obtained in lieu of the property is something that is unfair. Ideally, the property valuation should yield the amount that should be given.
But what can also help the initiative succeed is the general self-respect of people in many parts of the country. People normally wish to live off their own money and this will give old people a chance to fund their own expenses rather than ask their children for money. Also, in this era, where children are too busy to take care of their old parents, this incentive will help prevent senior citizens from being dumped into old age homes.
Banks in India offering this scheme
The National Housing Bank (NHB), the State Bank of India (SBI), Central Bank of India, Punjab National Bank and some others (about 23 banks in all, according to a recent report in Business Standard) currently offer this financial product. According to NHB, as of March 31, 2010, around 7,000 RMLs of Rs 1,400 crore have been sanctioned (as per the same Business Standard report). A conference was held recently under the aegis of NHB on their lifetime reverse mortgage loan scheme, which was part of their promotional strategy to make people aware of this product.These initiatives will hopefully help in convincing senior citizens, in dire conditions, of this lifeline post retirement.
7 comments:
Hey hari...thank you for the credit...i had just given an idea...u really did the good work wid ur explanation.
I wud like to add a point on--why reverse mortgage is not so popular: the points which u hav mentioned are very true. one of the reasons in why this is not so popular is coz in India there still exists a concept of joint family...and so very few ppl take reverse mortgage. Another reason is that in our country ppl will alws want to keep their property assets for their heirs....
excellent write-up. keep doing the good wrk...best luck
hey....i want to share one more piece of information which was told to me by my insurance prof...u have mentioned dat many banks n FI have started offering this product in our country... but SUD is the 1st life insurance company which got one such customer opting for reverse mortgage
Ya. I know that SUD offers this product. However I guess it does it in collaboration with some bank. Will check up on that an get back to you.
hey dude good wrk.. even i was thking of writing in blogs.. it helps u in ur own understanding..
@sanil:
Thanks dude and ya it really does help...
hi. any idea how to represent this in balance sheet ?
as and when the monthly payment is made, will the asset value be reduced ?
or is it simply increase in liabilities over the period of time ?
@ram: sorry for the late comment dude...
in my opinion,in the balance sheet of the receiver, it shall be the same as a normal mortgage; like you said,with an increase in liabilities (mortgage) and asset received (Cash) over time.
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