With globalization shaping the minds and lifestyle of people in India, and joint family system giving way to a nuclear one, older Indians want to spend their twilight years off their corpus of savings. But they just might discover that they have not planned for every need and contingency. Thus there could not be a better timing to introduce reverse mortgage loans in India as a practical solution.
There is a new ray of hope in the area of mortgage loans for senior citizens In India. Against the backdrop of an increasing old age population and life expectancy, rising costs of medical expenses and cost of living, Reverse Home Mortgage has been aptly introduced in Budget 2007-08 perceiving a potential market in India. Reverse mortgage business opportunities will also spur the economic activity of India.
What is Reverse Mortgage?
Reverse Mortgage is a loan scheme that allows senior citizens aged 62 years and above to pledge their house property to a reverse mortgage lender (scheduled bank or HFC) in return for a lump sum or periodic payments spread over the borrower’s lifetime. This contract between the homeowner and the financier enables the homeowner to receive a stream of income, especially in retirement, from the future realizable value of the home.
Mechanism:
Throughout the period that a reverse mortgage loan is outstanding, the borrower owns the home and holds title to it, without being obliged to make any monthly mortgage payments towards repayment or servicing of loan. On his demise or leaving the house permanently, the loan is repaid along with accumulated interest, through sale of the house. Any excess amount will be remitted to the borrower or his heirs. The lumpsum or periodic payments can be utilized by the borrower for his needs except speculative purposes.
In a nutshell, reverse mortgage boils down to converting the equity in a house property into an income stream. In real estate, equity is the difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house). You can thus make the highly useful variation of home mortgage work for you.
Origin:
The concept of reverse mortgage can be traced back to developed countries in the US, the UK, Canada and Australia where insurance companies took the initiative to introduce it to offset the ever-rising cost of pensions and health care for the people above 65 years that constituted a major chunk of the population. The payments received are considered as loan and hence are tax free.
Though Indians have for years have chosen to mortgage property for loan, the treatment of it has always been along fixed lines of mortgage. Reverse Mortgage, thus, has been devised to work as a financial helpline for retired and old people with no salary or business income to fall back upon. It offers seniors ample financial security by way of a regular cash flow to meet their needs, to live with dignity and to enjoy their post-retirement years. It assures the borrower of security and stability of returns.
By investing in a house by availing of a housing loan and repaying the loan during his working life time, one will not only ensure a roof over his head in his life time, but also secure a joint life pension, that will keep pace with inflation after retirement. All this information on reverse mortgage loans packs in enough motivation for people to build or buy their homes and, thereby, save for their retirement voluntarily.
Recently, National Housing Bank (NHB), a subsidiary of Reserve Bank of India (RBI), has prepared operational guidelines on reverse mortgage. Saksham, a reverse mortgage product has been launched by Mumbai-based Dewan Housing and Finance Corporation Ltd (DHFCL) in September 2006.