Finance minister P. Chidambaram’s budget speech in March this year has given Chennai’s Shaila Venkatraman and her husband Srikant a reason to look forward to their golden years with renewed hope.
The couple, both in their late 60s and without any children, has been worried about their savings running out in their golden years. That’s when a friend suggested they consider the option of reverse mortgage, a scheme announced by the FM early this year.
Four months after the announcement, the Venkatramans are examining two schemes—from Punjab National Bank (PNB) and Dewan Housing Finance Ltd (DHFL).
“Before we make up our minds, we need to understand a number of issues. Doubts, such as whether we need to pay tax on the monthly instalments we receive, or if it would be treated as income, still need to be made clear. We also want to check out the schemes from other companies such as HDFC and ICICI,” says Srikant.
In a typical reverse mortgage, an existing homeowner can generate cash flows from a house by borrowing against it, and continue to stay in it as long as he lives. He need not repay the loan ever, unless he sells the house. The mortgage company will sell the property after his death and recoup its investment.
Reverse mortgages are popular abroad, where senior citizens who are homeowners often use this scheme to generate either lump sum or regular cash flows to finance various expenses. The existing mortgage on the house can also be repaid with the proceeds from reverse mortgage.
In India, the National Housing Bank (NHB), the housing industry regulator that also oversees the execution of various reverse mortgage schemes, has specified a set of conditions under which the loan will be available (see FAQ).
S. Sridhar, chairman and managing director of NHB, says: “When you opt for a reverse mortgage, you will not be taxed. It will not be treated as income for you.”
Sridhar adds that NHB has already told housing finance companies and banks planning to launch the scheme that they would need to evolve their own accounting norms. He says that in most countries where such schemes are available, the income is exempt from tax.
DHFL and PNB have launched schemes that offer loans against house property. While the PNB scheme offers a loan up to 20 years with a fixed rate of interest of 15%, DHFL has come out with a 15-year loan plan. The company has not specified the interest rate. The amount of the loan will depend on the value of the property. PNB has also published a ready reckoner to give borrowers an idea of how much they can get as monthly income per lakh of rupees over a period of time .
Says V.K. Gupta, general manager in charge of PNB Baghban: “We launched the scheme before the guidelines came out. In view of the guidelines, we are fine-tuning our scheme. On the tax issue, we don’t believe that it should be treated as taxable income for the beneficiary. We are waiting for clarity and guidance from the finance ministry and NHB.”
DHFL did not reply to an emailed questionnaire on the scheme and how they have factored in tax and accounting procedures. Devendra Nevgi, head, fixed income, at Quantum Asset Management Company, sounds a note of caution: “The reverse mortgage structure has its own drawbacks for the borrower. Unlike a regular mortgage, where the principal of the loan reduces with time, in a reverse mortgage, the principal amount grows with time, as does the interest on the outstanding principal. And the owner of the house continues to be responsible for the maintenance and other charges of the house, such as insurance. But, on the plus side, there is no question of default and the owner does not lose his house. My advice would be for borrowers to check out the scheme thoroughly before signing up.”
TWO OPTIONS TO CHECK OUT
Eligibility: Resident of India, 60 of years of age or above
Loan amount: It will depend on the net realizable value of the property, after maintaining a margin of 20%. The maximum loan amount, along with the interest, is restricted to Rs1 crore.
Rate of interest: A fixed rate of 10% per annum, subject to review every five years.
Tenure: The loan will be a regular, fixed monthly payment during the loan period, or till the death of the last surviving spouse, whichever is earlier. The amount will vary depending on the age of the beneficiary.
Up front fee/documentation charges: Up front fee is equivalent to half-a-month’s loan instalment, subject to a maximum of Rs15, 000. There will be no documentation or inspection charges.
Right of rescission: After the loan is sanctioned, the borrower has up to 10 days to reconsider his decision. (Source: PNB website)
Eligibility: Sixty years of age and retired, owner and occupier of the property for at least a year.
Valuation of the property: The appraised value of the property will be estimated by the company’s own valuers or a registered valuer, based on the following parameters:
The circle rate of the property
The market value of the property
The longevity and structural viability of the property
The maintenance of the property
The infrastructure and the amenities provided
All other civil engineering parameters deciding the strength of the building
The appraised value may not be equal to the market value but somewhere close to it.
The loan will be sanctioned based on
Age of the borrower
Average value of the property
Rate of interest on the loan
The payment method chosen by the borrower.
Interest rate: Not disclosed
Loan tenure: Not mentioned (Source: company press release)
What is reverse mortgage? How does it work?
Reverse mortgage is a loan against a self-owned house that is available only to senior citizens. It is based on a “reverse annuity” concept where the mortgage company gives the houseowner a monthly instalment of the valuation of the house. National Housing Bank (NHB), the housing finance companies’ regulator, has issued guidelines according to which the maximum tenure of the loan will be 15 years. But Punjab National Bank (PNB), which has come out with a reverse mortgage scheme, has offered the loan up to 20 years.
Who can take reverse mortgage?
It will be available only to citizens above 60 years of age. According to the draft guidelines published by NHB, married couples will also be eligible as joint borrowers but at least one of them must be above 60 years of age.
Who will give me a reverse mortgage loan?
Housing finance companies and banks registered with NHB will give reverse mortgage loans. So far, only PNB and Dewan Housing Finance Ltd (DHFL) have announced such products .
How much can I get?
According to NHB guidelines, the amount of the loan will depend on the current market value of the property, prevailing interest rates and the age of the borrowers. The guidelines indicate that those between the ages of 60 and 65 will get 40% of the assessed value of the house. It will be 50% for those between 66 and 70 years, 55% for individuals between 71 and 75 years and 60% for those above 75 years. The guidelines are, however, clear that there will be no negative equity from the loan—the borrowers will never owe more than the net realizable value of the property. The loan amount may be reviewed by the mortgage company every five years. According to the grid published by PNB, the income will range from Rs490 per lakh for a 10-year loan to Rs135 per lakh for a 20-year loan.
How will I get the money?
You can get your money as a lump sum or a monthly or quarterly payment, or even as a combination of the two. However, lump sum payments are to be given only under certain conditions such as medical emergencies.
How will the interest rate be calculated?
NHB guidelines say the interest is to be fixed on the “usual manner based on risk perception, loan pricing policy, etc.” Mortgage companies will be allowed to offer loans on fixed and floating interest rates.
Can I change my mind about taking the loan even after signing the agreement?
Yes. NHB guidelines are clear on this. They say, “…after the documents have been executed and the loan transaction finalized, senior citizen borrowers may be given up to three days to cancel the transaction.” If the loan has been disbursed, you will need to return the loan within the period.
Can I get a loan if my house is already mortgaged to another company or if I have not finished paying for it?
You can if the mortgage company allows it. It will, in that case, repay the existing loan directly and the remaining amount will be disbursed as reverse mortgage loan.
How is the loan to be repaid?
The loan will be repaid by the sale of the house only when the last surviving borrower dies. If the borrowers themselves want to sell the property, the loan amount and the accrued interest on it will be settled from the proceeds of the sale of the house. However, before selling the house, the legal heirs will be offered the option of settling the loan amount and interest accrued. Only if they choose not to buy back the property will it be sold. Any remaining amount from the sale will be passed on to the legal heirs.
Can I prepay the loan?
Yes. There will be no prepayment charges for this.
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