Expresso

Reverse Mortgage - lessening financial woes

The ‘reserve-mortgage’ plan,first of its kind in India, is a proposed scheme for all senior citizens, which could lessen their financial woes. The scheme would bring in monthly cheques from banks and home-finance institutions, while an owner continues to stay in the comfort of his or her own home.

This reverse mortgage plan, is a loan against a home that the owner does not have to pay back as long as he or she lives there.

This scheme is popular in the developed countries, especially in the US. Its implementation in India is yet to be explored. Its believed that 'reverse mortgage' will help to lessen the woes of many elderly who face the financial crunch in their later lives when the children choose to settle elsewhere.

Rashmi

The idea seems fanciful.....

But such a scheme of reverse mortgage is indeed being framed by National Housing Bank (NHB), the regulator of housing finance companies. It is expected to be launched, early next year, after the Reserve Bank of India gives the nod. It will mean offering an old person (at least 62 years old) financial support based on the value of his house without displacing him.

The NHB will approach the senior citizens through banks and HFCs since its charter doesn’t permit it to fund the end-users directly. The last mile financier can only sell the house to keep the property to recover the dues after the loanee dies. But the latter’s heirs may opt to repay the loan to keep the property and free the mortgage.

In case, the person concerned survives the 15-year loan period, both the loanee and the co-owner (spouse) will be allowed to stay in the house as long as either is alive. The plan is to bundle the product with either insurance or a recurring deposit to ensure that the borrower receives money even after the deadline expires. The man would park, say, 5% of his reverse EMI in a recurring deposit in his name, to which he won’t enjoy access. The money which accumulates there can be utilised to service his needs after 15 years. Once he dies, the money goes either to the heirs or towards repayment of the loan.

The loanee needn’t service the sum borrowed during his lifetime. But if he wishes to retain ownership, he should repay the amount without any interest.

- Realty Plus

prasoon

Hi guys. Would like to share this another angle to the whole 'reverse mortgage' issue....

Reverse mortgage encourages home investment
The great thing about owning a home is that if one is in need of money in the future, one can always unlock its value - even without moving it. With reverse mortgage coming to India, home can become a financial planning tool for ones old age.

Unlike conventional mortgage, where with every EMI paid raises the equity of the house. And once the entire loan amount is repaid the house equity rises to 100 percent. Under reverse mortgage, one pledges the house with a financing institute that pays back a monthly amount based on factors like owners age, value of the house and so on.

However, though the financial logic in favor of buying a home continues to be compelling, but one must exploit the multiple advantages to the hilt. The home buyer must be on his guard while taking a loan.

- Money Times

Raj

Hi guys - found this interesting info on how reverse mortgage works, and thought I'd share it with you -

Reverse mortgage operates in a manner opposite to that of the typical mortgage such as a home loan. In a typical mortgage, you borrow money in lump-sum right at the beginning and then pay it back over a period of time. In your payback -- the EMI -- a portion goes towards paying the interest and the remaining goes towards paying back principal.

All along, you pledge the asset -- namely the home you have bought with the loan -- to the bank. This asset is the security against which the bank is lending to you. In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank in turn gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.

There are various forms of reverse mortgage available in the developed countries. The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one in which the tenure is 15 years and the owner of the house and his/her spouse continue to live in the house till their death -- which can occur later than the tenure of the reverse mortgage.

Simply put, in case a couple, if they were to opt for reverse mortgage for a tenure of 15 years, they will get annuity (the reverse EMI) from bank for 15 years. After that, the annuity payments stop.

However, they continue to live in the house. Assume that the husband dies after 17 years. The wife can still live in the house till she is alive. After her death, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

The bank bears the risk that the outstanding will exceed the market value of property then and will not ask for the difference from the heirs.

The key question is -- how much of an annuity income can my house generate using reverse mortgage? The banks have so far not indicated which interest rates they will use to determine the EMI -- however, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12-14%.

Second important variable is the loan to value ratio. Most loans against property work at 60% loan to value ratio -- i.e. by pledging a Rs 1 crore (Rs 10 million) property, you can get a Rs 60 lakh (Rs 6 million) loan. Some banks are however designing reverse mortgage products with a higher loan to value ratio -- as much as 90% 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. For simplicity consider a 60-year-old home owner taking reverse mortgage with loan to value ratio of 80% and an interest rate of 12%.

The annuity from reverse mortgage works out to be roughly ~Rs 160 per lakh of property value. Hence a property valued at Rs 80 lakh, the annuity the borrower can expect will be in the range of Rs 12,800 per month.

Coupled with his income from financial assets, he can continue to live comfortably with no cutback on lifestyle.

Source: rediff.com

master01

Dewan Housing Finance Corporation has very recently launched one such scheme. A home owner of 60 yrs or more will be eligible to receive EMI for 15 years @12% i.e. for every Rs.1 lakh of property value, bank pays an EMI of Rs.205/month. Further, on survival after 15 years, the owner continues to stay, while the loan accrues interest @12% p.a.

vikram

If Dewan Housing offers Rs 205/ lakh of property value per month, it won't make any sense to think about reverse mortgage, for elderly people.

Metropolitans apart. In smaller towns, residential properties generally come in the range of 3-10 lakh. In this case, an EMI of say Rs 600-Rs 2,000 cannot be of any help to them.

Even, if it is a metro and one has got a house of say Rs 50 lakh, even then the EMI comes at minuscule Rs 10K.

India needs to develop a comprehensive social security system for elderly, especially for those from the non-government sector.

The US and Japan has performed exemplary work in this regard. In US, a person after retirement gets plus US $ 2,000/ Rs 82,000 a month. In 2006 alone, the US government distributed more than US $ 500 billion among its senior citizens, and get trillions of dollars in reserves to meet the future requirements.

Hope that our authorities too will come out with something constructive to help out the senior India, struggling hard with intolerance and rejections by their own blood.

Richardsmith

Great thread,

Reverse mortgages can be a great solution for seniors who wish to remain in their home but are having difficulty making their monthly payments and meeting other financial obligations.