Reverse Mortgage Scheme Should Be Repackaged

March 12, 2008	(Be the first to rate this story!)  Loading ...
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Clarification in tax treatment in the Union Budget 2008-09 could save the reverse mortgage scheme from sinking. Launched with much fanfare and touted as a savior for the growing population of senior citizens in the country, the scheme failed to take off in a big way owing to lack of proper packaging and appropriate information dissemination to the target group.

Many senior citizens, retired from work and with limited savings, have to fall back on their sole property, the one they live in, to generate income.

An option often used in such a situation is to rent the existing house and move to a smaller house or to sell the house altogether and invest the proceeds to earn a higher monthly income. Either way, in their old age, such senior citizens will be forced to look around for accommodation and keep on worrying about the rising rents. This is where reverse mortgage can be of great value.

The reverse mortgage facility allows senior citizens to unlock the value of their home, by mortgaging it and enjoying the use of the money in their lifetime while continuing to live in their house until their deaths. In India, this scheme has not taken off in a big way despite being announced in the Budget for 2007-08, perhaps because it was not packaged or implemented the way it should have.

Reverse mortgage in the West In several Western countries, this concept is very popular. In the US, only house owners above the age of 60 years can apply for this scheme. The bank makes an evaluation of the current value of the home, decides the likely lifespan of the applicant and his/her spouse, and, decides what percentage of the current value they are willing to loan them. The bank also fixes the interest rate it wishes to apply. The loan usually amounts to 60-70 per cent of market value of the property, which may be given in simple lump sum or fixed monthly amounts. From time to time, the value of the property is re-assessed and suitable adjustments are made in the amount sanctioned. The principal-plus interest charges accrue at the bank while the applicants live in their home for the rest of their lives, or until they decide to sell the home.

Scheme since inception The process of reverse mortgage remains the same as explained above; however, Indian banks have so far capped the available loan amount at Rs 50 lakh, instead of providing for an equitable percentage of the property’s value, and limit the loan period to 15 years. Which 60-year-old couple would wish to put themselves in a position to have to redeem the principal plus interest amount when they are 75 or more, at which age they are unlikely to have the stamina to sell out and move to a new home, which would inevitably be their only option?

How much of an annuity income can a house generate using reverse mortgage? Most loans against property work at 60 per cent loan to value ratio. Some banks are however designing reverse mortgage products with a higher loan to value ratio, which could amount to almost 90 per cent in some cases. The specific annuity paid out also depends on the age of the home-owner, higher the age, higher the annuity everything else being constant.

Re-packaging needed Apart from a consensus on interest rate, banks and insurance companies need to repackage the product and provide better information to the target group about this scheme. The number of senior citizens in India is set to rise to 140 million by 2025 though it is unclear what fraction of them own homes and need such mortgages. Punjab National Bank, one of the few banks that officially launched its reverse mortgage product, PNB Baghban, has only been able to rope in about 100 interested parties. Dewan Housing and LIC Housing Finance are the other financial institutions that have launched this scheme.

Some of the recent clarifications, provided by the Union Budget 2008-09, would go a long way in making this scheme a success. The government has made it clear that the loan under reverse mortgage scheme will not be considered as transfer of capital, thus putting it out of purview of the income tax. “Reverse mortgage would not amount to transfer and the stream of revenue received by the senior citizen would not be income,” Finance Minister P Chidambaram said, while presenting 2008-09 Budget.

One of the reasons for low demand for this scheme was due to the lack of clarity on the tax treatment. Most banks and insurance companies launching this scheme must provide correct information and reach out to their target customers in a big way since the scheme has tremendous potential in the coming years.

News Published Under:   Real Estate India, Banking and Finance |

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