Magazine 2014
International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
REVERSE MORTGAGE SCHEME– A FINANCIAL TOOL
Sunita Sharma
ABSTRACT
Reverse Mortgage Scheme (R.M.S.) was announced by the Union Finance Minister P. Chidambaram
in the Finance Bill 2007, as a social security measure for the elderly. This scheme allows senior
citizens with inadequate income source to mortgage their own homes for a monthly stream of income.
This research paper makes an attempt to review RMS, cross country experiences and norms given by
Reserve Bank of India (RBI). Interviews conducted of bank officers incharge of RMS and senior
citizens who have taken advantage of the scheme, revealed pros and cons of the scheme.
Reverse Mortgage is relatively a new concept in India and it would take some time for a change of
mind-set of individuals to accept it.
Keywords : Reverse Mortgage Scheme (RMS), Reverse Mortgage Loan (RML), Conventional
Mortgage, amortized payment, Primary Lending Institution.
Introduction
Reverse mortgage scheme was announced by the Union Finance Minister P. Chidambaram in the
Finance Bill 2007, as a social security measure for the elderly. Reverse Mortgage allows senior
citizens with inadequate income sources to mortgage their own homes for a monthly stream of
income for up to 15 years.
A reverse mortgage is a form of equity release. It is a loan available to home owners or home buyers
over 62 years old, enabling them to access a portion of the subject home’s equity. The home owners
can draw the mortgage principal, in a lump sum, by receiving monthly payments, over a specified
term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.
In a conventional mortgage, the home owner makes a monthly amortized payment to the lender,
after each payment the equity increases by the amount of the principal included in the payment,
and when the mortgage has been paid in full the property is released from the mortgage. In a
reverse mortgage, the home owner is under no obligation to make payments, but is free to do so
with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a
payment in reduction of a line of credit increases the available credit by the same amount. Interest
that accrues is added to the mortgage balance.
Objectives
This study about Reverse Mortgage Scheme has been carried out with the following objectives.
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To know the cross country experiences.
To list the prudential norms on capital adequacy and asset classification given by Reserve
Bank of India (RBI) to banks.
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To find out the problems faced by borrowers of Reverse Mortgage Loan (RMLs) and give
suggestions to make the scheme popular among needy senior citizens.
To study the pros and cons of RMLs.
Research Methodology
Data has been collected both from primary and secondary sources. Descriptive research methodology
has been used to study the RMLs given by the banks. Primary data has been collected with help of
structured questionnaire by employing field survey method. The study was conducted in the city of
Mumbai. A random sample of 25 senior citizens who have taken RMLs and 10 bank officers incharge
of RMLs were interviewed. Questionnaire for the senior citizens covered questions on – age of the
borrowers, how did they come to know about RMS, purpose of taking loan, bank procedure, problems
experienced and suggestions to make this scheme popular. A focused interview of bank officers
was also conducted to collect information on above issues.
Information has also been taken from annual reports of RBI, commercial banks and internet.
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RESEARCH HORIZONS, VOL. 4 JULY 2014
Cross Country Experiences
Reverse mortgages in Canada
Reverse mortgages are available through private corporations in Canada, examples include: The
Canadian Home Income Plan (CHIP)s provided by Home Equity Bank, is the largest program in Canada,
the Fixed Term Reverse Annuity Mortgage through Royal Bank of Canada (RBC) and Home Income
Plan (Canadian Reserve Mortgage from origin mortgages).
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To qualify for a reverse mortgage in Canada the borrower (or both borrowers if married) must be
over a certain age usually atleast 55 or 62 years and must own the property ‘entirely and nearly’.
There is no qualification requirement for minimum income level.
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Reverse mortgages in Canada are usually a maximum of 25 to 50% of the property value, and the
loan might be constrained to a minimum $20,000 and a maximum of $750,000.
The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other
types of mortgages. Depending on the reverse mortgage program, the following types of costs
will be incurred – real estate appraisal = $175- $400, legal advice $400- $600, other administrative
costs - $1,495.
Reverse Mortgages in Australia
There is little regulation, although potential borrowers should seek financial advice.
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To qualify for a reverse mortgage the borrower must be usually 60 or 65 years of age if mortgage
has more than one borrower, the youngest borrower must meet the age requirement. The borrower
must own the property.
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Reverse mortgages can be as high as 50% of the property’s value; depending on the borrower’s
age & property location.
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The cost of getting a reverse mortgage includes
An application fee = $950.
Stamp duty, mortgage registration fees and other government charges = Vary with location.
Some reverse mortgage programs offer fixed rate loans while offer variable rates. In addition
there are costs during the life of reverse mortgage, for which a monthly service charge of $12 per
month may be applied to the balance of the loan, which then compounds with the principal.
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The loan shall be liable for closure due to occurrence of the following (events of default)
Borrower(s)s not stayed in the property for a continuous period of one year.
Fails to pay property taxes or keep the home insured.
Borrower(s) declares himself bankrupt.
Residential property mortgaged to the bank is donated or abandoned by the borrower(s)
Due to perpetration of fraud or misrepresentation by the borrower, government under statutory
provisions seeks to acquire the residential property for public use.
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Any other event such as re-marriage of the borrower(s) etc which shall have an adverse impact on
the loan settlement prospects.
Borrowers do not accept the revised terms on revaluation of property and interest rates at the end
of every 5 years from date of sanction.
Reverse Mortgages in the United States
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age
and must occupt the property as their principal residence. There are no minimum income or credit
requirements because no payments are required on the mortgage. The proceeds from the loan may
be used at the discretion of the borrower and are not subject to income tax payment.
Before starting the loan process, applicants must take an approved counseling course, which is meant
to serve as a safeguard for the borrowers, to ensure they completely understand the reverse mortgage.
The maximum lending limit varies, but may not exceed $625,500. Reverse mortgages for homes valued
over the maximum limit are called “J umbo” reverse mortgages. The amount of money available, is
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RESEARCH HORIZONS, VOL. 4 JULY 2014
determined by the borrower’s age, lesser of the value of the home and the interest rate of the program
the senior selects. The primary factors are – the appraised value of the property, the interest rate as
determined by the US Treasury, the age of the senior (the older the owner is, the more money will be
received) and how the payment is taken (lumpsum or monthly).
The Reserve Bank of India (RBI) has formulated the following guidelines for a reverse mortgage.
Reserve Bank of India Guidelines for Reverse Mortgage Loans
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RMLs are to be extended by Primary Lending Institutions (PLIs) viz., Scheduled Banks and Housing
Finance Companies (HFCs) registered with National Housing Bank (NHB) or any other class of
institutions as may be notified by Government of India.
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The eligible borrowers are senior citizens of India above 60 years of age, in case of married
couples one of them should be 60 years of age and the other not below 55 years of age.
The borrower should be the owner of a self-acquired, self occupied residential property, as assessed
by the PLT, age of borrower(s), and prevalent interest rate.
The PLIs would ensure that the equity of the borrower in the residential property (Equity to value
ratio- EVR) does not at any time during the tenure of the loan fall below 10%. The PLIs will re-value
the property once every five years. The quantum of loan may undergo revisions based on re-
valuation of property at the discretion of the lender.
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The nature of the payment by periodic (monthly, quarterly, half-yearly, annual) or lump-sum in one
or more tranches, decided in advance as part of the RML convenants. The maximum monthly
payments shall be capped at Rs. 50,000/- or such other amount as may be notified by the
Government of India.
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The loan amount can be used for the following purposes:
Up gradation, renovation and extension of residential property
For uses associated with home improvement, maintenance/insurance of residential property.
Medical, emergency expenditure for maintenance of family
For supplementing pension/other income
Meeting any other genuine need
The RML cannot be used for speculative, trading and business purposes.
The maximum loan disbursement tenure cannot exceed 20 years
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The interest rate to be charged on the RML to be extended to the borrower will be fixed, by PLI
based on risk perception, the loan pricing policy etc. and specified to the prospective borrowers.
Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms
and conditions in a transparent manner, upfront to the borrower.
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The RML shall be secured by way of mortgage of residential property, in a suitable form, in favour
of PLT.
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Commercial property is not eligible for RML
The PLI shall determine the market value of the residential property through their external approved
valuer(s) This shall be done every five years. The methodology of the revaluation process and the
frequency will be clearly specified to the borrowers upfront.
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All the payments under RML are exempt from income tax under section lo(43) of the Income- tax
Act, 1961.
Reverse Mortgage Lenders in India
The banks offering RML for the welfare of senior citizens in India are- State Bank of India, Punjab
National Bank, Bank of Baroda, Central Bank of India, Union Bank of India, Indian Bank, Andhra Bank,
Corporation Bank, Canara Bank and LIC Housing Finance. Table 1 shows a brief comparison of salient
features of RMLs offered by key public sector banks.
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RESEARCH HORIZONS, VOL. 4 JULY 2014
Table 1
Salient Features of RMLs offered by Four Public Sector Banks
Source: Annual Reports 2012-13 of above mentioned banks.
Findings
The survey revealed the age group of borrowers was between 60-65 years. The various reasons
listed by the respondents for taking RML were- lack of funds to meet their day to day expenses, no
other source of income, lost their son and son deserted them. The senior citizens, who were
interviewed, had come to know about RMS through – friends, relatives, family doctor and bank
pamphlet. 75% of the respondents felt that the banking procedure to sanction the loan was very
lengthy. Different reasons listed for RMLs, not being a popular scheme among needy senior citizens
were – many terms and conditions, required many documents, expensive costly and strict procedures.
Different suggestions given by the respondents to make RMS popular were-regular advertisements
in the newspaper by banks, take help of Life Insurance Corporation to popularize the scheme and
handouts and pamphlets to be distributed widely among senior citizens. Infact many nationalized
banks are not giving loans for this scheme. Many bankers were not even aware that, a scheme like
reverse mortgage existed for senior citizens.
Pros and Cons of RMLs
Interviews of senior citizens and bank officers conducted revealed the following advantages and
disadvantages of RMLs
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Given the right set of circumstances, a reverse mortgage, is an ideal way to increase one’s
spending power in retirement.
On a home equity loan, one can lose one’s home, on default. But in a RML one’s home cannot
be taken from the borrower for reasons of nonpayment.
With a reverse mortgage one will never owe more than one’s home value at the time the loan is
repaid.
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The reverse mortgage lenders have no claim on income and other assets of the borrower.
The money the borrower gets from a reverse mortgage is not free money. It is a business
transaction, as banks are in business to make money. The banker gets a guarantee that the
loan will eventually be repaid.
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On taking a RML, the borrower will have less equity in one’s home. The interest on the amount
borrowed, also reduces one’s home equity.
Reverse mortgages are more expensive than traditional home loans, as the banker cannot ask
for a payment from the borrower, till alive. He charges higher interest than traditional mortgage,
to compensate for the greater risk.
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It is often said that if you take RML, you’ll lose your home! to the bank. This loan is for only those
senior citizens, who do not have heirs.
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RESEARCH HORIZONS, VOL. 4 JULY 2014
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Many reverse mortgage sales people, have no idea of what they are talking about. They’ll say
and do anything to get the sale, upto including using bait and switch and high pressure sales
tactics.
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Reverse mortgage borrowers usually get 30-80% of the value of their home. therefore one needs,
a lot of equity to qualify for a reverse mortgage loan. Reverse mortgage is merely a means of
tapping into the home equity one has.
To make best use of reverse mortgage, one has to plan properly. If one is concerned about running
out of money, than the reverse mortgage plan one chooses should be of income option, which
guarantees a monthly amount. If one’s home appreciates at a high pace, one will be able to refinance
one’s reverse mortgage and get more money in the future. Thus reverse mortgage will help to provide
all the money one needs for rest of his life.
Conclusion
Though introduced in 2007, reverse mortgage has not gained much popularity in India for the following
reasons:
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The marketing of RMLs done by bankers is inadequate. Recent reports and interviews revealed
that many bankers, as well as senior citizens are not aware of the existence of such a loan
scheme.
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Many banks which offer reverse mortgage have capped the maximum loan amount available
for individuals to a maximum amount of Rs. 50 lakhs to 1 crore.
Children have resentment for a reverse mortgage, as they see it as giving away their family
home or legacy.
Reverse Mortgage is a relatively new concept in India. It would take some time for a change in mind
set of individuals to accept it. As a financial tool, reverse mortgage is ideal to augment a senior
citizens income in his years ahead. Despite all its shortcomings in India, it could make good the
shortfall in one’s pension or income to live a quality life ahead.
References
Bank of India. (2012-13), Annual Report
Central Bank. (2012-13), Annual Report
Punjab National Bank.(2012-13), Annual Report
Reserve Bank of India. (2010-11), Annual Report
State Bank of India (2012-13), Annual Report
Websites
http://www.indiantaxupdates.com/2013/01/14/reverse-mortgage-the-loan-that-pays-you/#
ixzz2NR3xXUmw.
http://www.indiantaxupdates.com/2013/01/14/reverse-mortgage-the-loan-that-pays-you/#
ixzz2NR4MFcx.
http://www.deal4loans.com/loans/reverse-mortgage-loan/general-guidelines-of-reverse-
mortgae/
Read more:http://www.indiantaxupdates.com/2013/01/14reverse-mortgage-the-loan-that-
pays-you/#ixzz2NR3cQKDQ
www.99acres.com
www.wikipedia.com
Prof. Sunita Sharma : Head, Dept. of Commerce, Maniben Nanavati Women’s College, Mumbai.
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