Mr. Patel retired after a very successful career in a private sector bank. He held his head high all through his career and now wants to do the same in future also. His only daughter Supriya got married to Anshul working with a leading American investment bank in Mumbai last year. Being the only child, the wedding was a very grand occasion. The entire cost of the wedding was around 40 lakhs which included his daughter’s jewelry, the car he gifted to Anshul, and other normal wedding expenses. He stays at Kandivali and the cost of his flat is around 60 lakhs.

Mr. Patel used up almost all his savings he had done till date in marrying Supriya off. Mrs. Patel, a house wife, also contributed around 6 lakhs that she had saved over the years. Now, the only money Mr. Patel has is around 5 lakhs in his bank fixed deposits and Rs. 10 lakhs in his PPF & EPF accounts. Added to this, he will get around Rs. 6 lakhs as gratuity from his company.

His worry now is how to arrange for his monthly expenses, somewhere between Rs. 25,000 to Rs. 30,000. He also wants to take his wife to Vaishno Devi and Haridwar - a promise he had made to his wife, to be kept once Supriya’s wedding was done.

The traditional option he would have had was to rent out his flat and move with his daughter or move into a smaller flat. Not any more.

Citizens such as Mr. Patel can now opt for a reverse mortgage. A reverse mortgage is where a senior citizen can mortgage his/her primary residence with a bank and receive the mortgage amount as periodic payments, be it monthly, quarterly, half-yearly, or yearly. So, Mr. Patel visited a few banks and found two options from most of the banks. In the first option, he would qualify for 90 per cent of the realizable value of his property at the end of his chosen tenure. This amount would be paid to him in monthly EMIs for the chosen tenure.

In the second option the loan amount would be 50 per cent of the present value of his property.

He went ahead and did a little calculation to find out which of these options would suit him better.

In the first option, he assumed the property rates to grow at rate of 8% per annum, which is the current risk-free rate. All other conditions remaining constant, he was getting an amount of Rs. 41,329. His calculations yielded only Rs. 38,686 on option 2. If he did the same calculation taking the rate of return on real estate at 12 per cent he got the EMI amount of Rs. 71,313, which is way above what he would get in Option 2. Choosing to go for the reverse mortgage helped Mr. Patel to live with his head held high for the rest of his life. With the amount of money he got from his gratuity, he took his wife on a pilgrimage of all dhams in India. He gifted all his fixed deposits to his daughter after the birth of her first child.

With the explosion of nuclear families in India, senior citizens are finding it increasingly difficult to finance their personal expenses. Old age is filled with problems that never seem to end. Elderly people find it difficult to meet their medical expenses within the usually small pool of investments that they have made. It becomes challenging for them to live their life with contentment

Though government employees do get their regular pension when they retire, it is no where near enough to meet their needs upon retirement. For self-employed and other salaried individuals the situation is worse, especially if they do not have any savings.

In India there is barely any financial assistance provided by the government for senior citizens who have retired and do not have any regular source of income. It was in this regard that the Union Budget 2007-08 introduced comprehensive guidelines for the concept of reverse mortgage.

Reverse mortgage is a scheme that provides mortgage loans to senior citizens above 60 years, who might not be eligible for any other type of loan. Senior citizens can mortgage their house property to a lender. The lender in return makes periodic payments to the borrower during his/her lifetime, up to a maximum period of 15 years. The borrowers can continue to stay in their mortgaged houses as long as they live. The borrowers are not obliged to repay the loan; the lender simply attaches the property if the borrower and his/her spouse pass away. Even if the borrower and his/her spouse were to outlive the tenure of the reverse mortgage, they can live in that house until their last days. They would just stop receiving the installments from the lender.

Reverse mortgages have a host of advantages, the main among them being that senior citizens have a viable income now to meet expenses. Since this is a secured mortgage instrument, the borrower does not require a regular source of income to be eligible for the loan.

The borrower can continue to stay in the mortgage house till he/she and spouse pass away or change residence, while receiving the periodic payments from the lender. While the property is hypothecated to the lender, the borrower will remain the owner of the property throughout the tenure of the loan. The reverse mortgage can be disbursed in regular installments or as lump sum.

However, the concept of reverse mortgage has not yet picked up in India, though it is very popular in the West. Since it is a new model there is a bit of confusion among the borrowers as well as lenders.
The tax treatment is not yet very clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan. There is also no clarity on whether the lender has to pay a property gains tax on the sale of the property.
Banks are finding it difficult to work out the interest component to be charged on reverse mortgage. Moreover, they insist on insurance cover for this product, but there aren’t any insurance products to back this concept.

The author is a Research Analyst at Apnaloan.com Services (P) Limited.