Reverse mortgage — options on the increase for senior citizens

Plan for your retirement the moment you get a job — or you'll need to think of schemes such as reverse mortgage, says Mr D. Krishnamurthy, Vice-President, Star Union Dai-ichi Life Insurance Company.

And since most of us haven't done that kind of planning, we better know what reverse mortgage is!

Product explained

A reverse mortgage is a product by which senior citizens can pledge the property they own to a bank which in turn provides them a loan structured into regular payments (to serve as income) until their death.

The amount of loan depends on the age of the borrower, value of the property, interest rates and other costs.

The advantage for the borrowers is that they can continue to stay in the property without the fear of losing their property and being on the streets in the last years of their lives. They don't have to repay the loan in their lifetime.

After their death, the bank takes over the property and recovers its loan.

For senior citizens faced with limited earning options, raging inflation, lifestyle changes and high medical costs, this represents a lifeline.

On the face of it, reverse mortgage is a product whose time has come. Yet it has been slow to gather momentum.

Mr S. Sridhar, former Chairman and Managing Director of Central Bank of India, who played an important role in developing this product during his stint at the National Housing Bank, said recently that his bank had done about 65 cases of reverse mortgage amounting to about Rs 90 crores so far.

He said that it was a niche product and more awareness had to be built about it

Mr Krishnamurthy, a career banker who has recently switched to insurance, says societal attitudes and sentimental attachment to property have a lot to do with the lukewarm reception.

In India, people have by and large wanted to bequeath their property to their children.

That may however be changing a bit especially among the middle and upper middle class families. Some senior citizens have now begun to feel that they should benefit from the property and live a comfortable and decent life with dignity, he says.

He cites a number of instances of customers who come in spurred by a variety of motivations and emotions. Some don't want to trouble their children.

There are some who don't want their children to get anything from their property and, therefore, prefer this option.

And there are some amazing instances of children taking the initiative and asking him to arrange for a reverse mortgage loan for their parents — and offer to pay it quietly — so that their parents can live in dignity — without being dependent on them!

ADDRESSING MISGIVINGS

Mr Krishnamurthy also says that changes introduced in the product recently have addressed some of the misgivings that prevented it from taking off.

He points out that earlier, these products were for a fixed period of, say, 15-20 years. This often led to some anxiety on the part of many senior citizens about what would happen to them if they outlived this period.

Besides, there were taxation issues — whether the amount received from the bank would be treated as income and, therefore, liable to tax.

Then there were risks for the lender, including mortality risk — the prospect of the borrower living longer than anticipated and, therefore, making payments for a longer period of time.

There was interest rate risk, since the lender assured a fixed payment to the borrower for a long term while interest rates could fluctuate.

And there was property risk — the possibility that price of the property would drop to an amount that was lesser than the value of the loan.

These issues have since been tackled one by one. There is now no need to repay the loan, during the lifetime of the senior citizen. Nor is there any requirement for servicing of interest.

The issues of interest rate risk, mortality risk and property risk have been tackled by bringing in an insurance company, which inherently has the expertise to tackle these issues because of the long-term nature of its business.

For instance, life insurer Star Union Dai-ichi has tied up with a couple of banks to offer customers a more attractive reverse mortgage option (see box).

Taxation issues are still being sorted out.

The amount received by a borrower under a reverse mortgage scheme from the bank is not considered as income. (But in the new product, which is linked with an insurance company, the annuity received is taxed as income.)

Besides, the interest payable by the borrower on the loan is treated as accrued interest and liable to income-tax in the hands of the bank.

This is one more reason why banks are less than enthusiastic about the reverse mortgage product.

The National Housing Bank has taken up the issue of providing a tax rebate for the annuity received by senior citizens with the authorities concerned.

An early resolution of this issue by the Finance Ministry is required if the product needs to take off. That will provide senior citizens with more options while enabling banks and insurance companies to tap this market now.

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