Reverse Mortgage Loan: An innovative retirement solution

By : Parizad Sirwalla, Executive Director - Tax and Rambir Dalal, Associate Director - Tax, KPMG

Four socio-economic and demographic trends are clearly discernible in India. At the societal level, the intergenerational contract is changing and with more and more neutral families, some children no longer feel the obligation to care for their parents.

At the economic level, the standard of living is constantly going up and people need more income to meet their aspirations.

At the demographic level the birth rate is declining and life expectancy is going up. On the policy front, only 10% of the population has access to a credible pension plan. If we put all these trends together, we have a situation of insufficient income for a sizable elderly population in India. As a result, providing income security to the country's retired population has become a major challenge for the Government.

To combat this situation, the government of India has been striving to provide a secure post-retirement life to its citizens and introduction of reverse mortgage loan (RML) scheme constitutes one of such attempts.

This scheme, after its introduction via Budget 2007-08, is being regulated by National Housing Bank ('NHB') which plays the role of regulator as well as instructor by issuing continual guidelines to the Primary Lending Institutions ('PLIs') who are the service providers.

Some of the service providers of reverse mortgage loan scheme are Punjab National Bank, State Bank of India, Bank of Baroda, Dewan Housing Finance limited, and Union Bank of India.

Under this scheme, citizens aged 60 years or above will be able to mortgage their house and derive an income either in lump sum or monthly payments while living in it. If one goes for the lump sum amount, one can deposit it in a bank, withdraw from the account according to requirements and keep earning interest on the balance.

Thus, reverse mortgage seeks to monetize the value of the house as an asset (without actually selling the house) and specifically the owner's equity in the house. In this scheme, the senior citizens mortgage their house property to a lender in return for payments of the decided loan amount during their post-retirement years.

The reverse mortgage loan scheme has various facets such as determination of loan amount, modes of receiving payment, ulitization of funds, valuation of residential property, loan disbursement procedure, settlement of loan etc.

Important Features:

Only senior citizens of India are eligible to opt for RML scheme by mortgaging their self owned as well as self acquired residential house property situated in India. Moreover, married couples can also take a reverse mortgage loan as joint borrowers for financial assistance for which the age criteria would be at the discretion of the Primary Lending Institution.

The loan can be availed for a maximum period of 20 years  and the amount that can be disbursed as loan shall be determined by PLI depending on various factors like market value of the house property, age of borrower, rate of interest or any other criterion, varying from lender to lender.

RML is a flexible avenue for meeting the expenses in old age as the borrower has the option to pick any mode of payment from three available modes viz. lump-sum payment, periodic payments or Line of credit.

This scheme has tax incentives for elderly as periodic payments received by them are tax exempt and only final sale of the house at the end of the loan duration is taxable as a capital gain income.

How is it different from conventional mortgage?

The conventional mortgage requires borrower to make monthly payments until the mortgage is paid off whereas in Reverse mortgage no payments are to be done until the borrower sells the home or dies.

In conventional mortgage the interest is charged and paid over the life of the loan. In reverse mortgage, interest is charged starting at the day borrower begins to receive the loan proceeds but not paid, until the reverse mortgage loan becomes due. A conventional mortgage is like a true mortgage loan, while reverse mortgage is more like a home equity loan.

Conclusion

Despite being such a lucrative and beneficial scheme, not many senior citizens have opted for RML in India. The reasons for the model not taking off include emotional attachment with one's house, real estate price correction, absence of clear guidance against legal complications and inadequate marketing by the PLIs.

With the increasing need of post retirement liquid compensation in India, RML can be viewed as a potential alternative as the scheme is beneficial to both the borrowers and lender simultaneously.

It is being projected that, RML is expected to gain popularity with the changing mindset of Indian citizens and increasing need of cash flows in old age. 

Needless to say that if more awareness is actually created about the scheme and more robust marketing of the product undertaken by PLIs , this scheme can ameliorate the rundown condition of elderly people in India.