You have spent a lifetime working, providing and saving. You have built a home and brought up your children. They got the best education possible, got their life partners and are now in far-off lands, leading their own lives, nurturing their own dreams, waging their own struggles.
As you lean back in your twilight years, you find that life still needs a lot of money, and that you are short of it, despite the savings. There is one consolation though, you have a house of your own. It's a familiar story, but now it will acquire more promise and dignity.
The concept. The finance minister introduced the idea of reverse mortgage in this year's Budget. Under it, citizens aged 62 years and above will be able to pledge their house and derive an income -- monthly or a lump sum -- for 15 years while living in it. If you go for the lump sum amount, you can deposit it in a bank, withdraw from your account according to your requiremetns and keep earning interest on the balance. Says Harsh Roongta, director, Apnaloan.com, "A product of this kind was absolutely necessary."
Guidelines. The National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), is preparing the guidelines on reverse mortgage. NHB chairman S. Sridhar says: "We have formulated the draft operational guidelines and circulated them among banks for their comments and suggestions. They are expected to be finalised shortly."
Although the finer aspects of reverse mortgage have still not been finalised, some things have been made public (see Onward Bound in Reverse Gear, 17 August 2006).
Loans will be given only to those who have a clear title on their property (See below: Reverse Role: Where You Stand).
This rule applies to both stand-alone houses as well as flats. In case of inherited property, all claimants to it will need to give their consent in writing. Sridhar says that if the property is inherited, the lender (banks or HFCs) will be guided by legal advice on the borrower's clear rights or title. Another requirement is that prospective borrowers will be able to pledge their house only if they are using it as their permanent primary residence. Sridhar says it may not be possible to provide reverse mortgage for houses on power of attorney.
As per the present rule, the lender will take possession of the house, sell it and adjust its dues if the borrower dies. It doesn't specify what course would be taken if the children of such borrowers neither have the financial means to reclaim the house nor are willing to vacate it. The NHB says "the children will have to leave within a reasonable time that the bank/HFC takes to effect the sale." To take into account any change in the value of the property during the tenure of the loan, there will be a provision for its revaluation at least once in five years.
"The loan quantum may get revised on the basis of such revaluation. The methodology of revaluation and its schedule shall be clearly specified to borrowers upfront," says Sridhar.
Reverse Role: Where You Stand
The guidelines for reverse mortgage are not final yet, but a few aspects have been made public. Here are the answers to some of the questions you may have:
I am 58 years old. Do I qualify for a reverse mortgage (RM) loan?
No. As per the current guidelines of NHB, couples/individuals have to be at least 62 years of age to qualify for the loan.
I stay in an apartment in a housing society. Can I pledge my house for an RM loan?
Yes, provided the property title is clear. The transaction agreements are being worked out for houses that are on power of attorney.
I stay with my son in Mumbai. Can I pledge my Delhi house and avail the loan?
No, because borrowers should be using the residential property for which they are seeking mortgage as permanent primary residence.
Will I get a fixed EMI for 15 years?
The NHB is likely to mandate a revaluation of the property at least once in five years. The quantum of loan may get revised as a result of such revaluations. This means that the EMI will be flexible.
What will happen if the liability (principal + interest) exceeds the value of the property during the term of plan?
The lender will have recourse only to the property and will need to face the risk.
Tenure travails. The rules might need a few modifications to ensure smooth operation of the scheme. One clause that is likely to draw a lot of criticism is the one that fixes the maximum loan tenure at 15 years. The NHB will need to address the concern of borrowers over their predicament if they outlive the credit period. At present, the rules say that a borrower's supply of income will be severed if he survives the loan tenure. However, he can continue to live in the house till his/her demise. The response to the product will be affected if this state of affairs persists.
Reverse mortgage enthusiasts are awaiting the NHB's final guidelines. Says S. K. Mitter, director and chief executive, LIC Housing Finance: "We would be interested in launching the product as soon as the guidelines become clear. There is a very good market in India -- there is a big segment in Tier-II and Tier-III cities and semi-urban areas waiting to be tapped."
Social dimension. The initial ride of the idea is expected to be slow and bumpy. Unlike in the West, joint families are still prevalent in many parts of India, although their number has shrunk. In many cases, the culture of joint families persists even after nuclearisation. In this scenario, many parents would still prefer to bequeath their house to their children rather than live off it.
More importantly, as Roongta says, "It's a product that requires a great degree of regulation and transparency, both of which are missing in India."
The rough ride that the idea is expected to have, at least initially, is borne out by the way people have reacted to Saksham, a reverse mortgage product launched by Mumbai-based Dewan Housing and Finance Corporation Ltd (DHFCL) in September 2006. The company has received close to 200 enquiries from major cities in India about Saksham, but no one has signed up for it yet. Enquirers back out because the guidelines for reverse mortgage are not final.
Says Kapil Wadhwan, managing director and vice-chairman, DHFCL, "The absence of a clear-cut legal framework is creating difficulties for us."
The Kerala State Co-operative Bank recently announced its decision to introduce the reverse mortgage scheme. The bank says that it is waiting for the NHB to announce the final norms.
Safeguards. Under the existing regulatory regime, banks come under the RBI and HFCs under the NHB. Sridhar points out that the recommendations of the regulator are only advisory in nature. The NHB plans to provide guarantee to borrowers against default by lenders by starting a loan mortgage company. The company would also safeguard the interest of lenders in case borrowers bungle on the terms of the agreement.
The extent to which the potential of reverse mortgage gets realised in India will depend a lot on the guidelines that will govern it. Much will also depend on how Indian society takes to it. But there is no doubt that it can lend dignity and peace of mind to elders by opening a financial lifeline for them. Watch this space. Outlook Money will keep you updated on the issue.