Wednesday, May 23, 2012

A New Source of Income for Senior Citizens - Reverse Mortgage Loans


Before we begin, this article is dedicated to all those Senior Citizens who are facing financial hardships in their old age. Dear Grandpa's and Grandma's this article is for you...

This article is about a new source of income that is available for all Senior Citizens who own a house. It is called "Reverse Mortgage". This is a very popular scheme in the United States and has recently been introduced in India.

What is a Reverse Mortgage?

A Reverse Mortgage is similar to a Home Loan with a small difference. Instead of us repaying the bank monthly EMIs the Bank will pay us a Monthly Amount for as long as the Customer (Senior Citizen) is alive. After the demise of the Senior Citizen or end of loan tenure whichever is earlier, the bank will take possession of the house, sell it to collect the amount the customer owed them and pay the remaining to the survivor of the customer.

The great thing about this loan is the fact that, the customer can continue to stay/reside in the property during the loan tenure.

Sounds an Interesting Proposition, doesnt it?

Who can Use this Reverse Mortgage Loan?

Any Senior Citizen who is older than 60 years of age and owns a property in his/her name is eligible to apply for this Reverse Mortgage Loan. The amount we get every month depends on the value of the property we own.

How will this Reverse Mortgage be useful?


Funding their expenses post retirement when there is no regular monthly income is the single biggest concern in India. Especially since we do not have a well-established Social Security kind of System in India. So, citizens are left to fend for themselves. A majority of Senior Citizens in India do not have much savings and are entirely dependent on their children for their survival.

Lack of Financial Independence is something that no elderly individual in our country must go through. But, unfortunately the harsh reality is the fact that almost 80% of the Senior Citizen population in this country are Financial Dependent on their Children and hence all the trouble.

Can We Repay this Reverse Mortgage Loan?

Yes. If the Survivor of the customer or the customer himself wishes to close the loan, they can settle the whole amount due (including the Interest) to the bank and reclaim the property.

Some Terms & Conditions Reg. this Reverse Mortgage Loans

1. Any house owner over 60 years of age is eligible for a Reverse Mortgage
2. The Maximum Amount that can be borrowed is up to 60% of the property value. The Exact amount varies from bank to bank
3. The Maximum period of property mortgage is 15-20 years depending on the Bank
4. The borrower can opt for monthly/quarterly/half yearly/annual or lumpsum payments at any point as per their wish
5. The Bank will conduct a Revaluation of the property once every 5 years
6. The amount received from the bank is considered a Loan and not an Income. So, it is not taxable
7. Banks offer both Fixed & Floating Rate Interest options on the loan. The customer can choose the scheme that suits them best

Banks in India that Offer Reverse Mortgage

Almost all major banks in India offer this scheme. Bank of Baroda, Punjab National Bank, State Bank of India are some of the top names that offer this Scheme.

A Sample Example Calculation

Let us say Mr. Mahesh a senior citizen in my locality owns a Flat in Chennai that is worth 75 lakhs in todays market price. So, he is eligible for a Reverse Mortgage Loan of up to 45 lakhs.

What will be his monthly income if he chooses a Loan Tenure of 10, 15 or 20 years?

For 10 years - Rs. 21,375/- per month (At Rs. 475 per lakh for 45 lakhs)
For 15 years - Rs. 10,340/- per month (At Rs. 230 per lakh for 45 lakhs)
For 20 years - Rs. 5,625/- per month (At Rs. 120 per lakh for 45 lakhs)

Does this Scheme have any Negatives?

As pointed out by one of our blog readers Mr. MN, this scheme too has a drawback.

If the borrower outlives the loan duration, the bank will still take possession of the house and try to sell it to collect the money the borrower owes them. So, this is something every senior citizen must keep in mind before signing up for this loan.

Verdict:

Our beloved Senior Citizens have worked for more than 40 years of their lives to support their children. Post retirement, they must not have to face financial hardships just because they arent earning. Schemes like this Reverse Mortgage are a boon to these people to meet their monthly cash requirements. Even in todays cost of living 10,000 rupees is a significant amount of money that should be sufficient to meet the cash requirement of two people who have no Rental commitments to pay.

All in all, this is an excellent proposition for all Senior Citizens who are looking for a second source of Income.


A Humble Request: Not many people know about this Reverse Mortgage Scheme. It would be a good idea to share this information with all your friends so that they can pass on this valuable piece of information to help out the needy Senior Citizen population of our country. If even 100 Senior Citizens of our country benefit out of learning about Reverse Mortgage Scheme by reading this blog, I would consider it a fantastic success... Best Wishes!!!

11 comments:

  1. Hi Anand,
    .
    I would've expected a pros-and-cons type of analysis on a sensitive subject like this. I can only see the positives on your post and none of the problems associated with the rev-mortgage scenario (makes me wonder if there's any negative aspect at all).
    .
    Thanks!
    MN

    ReplyDelete
    Replies
    1. @ MN

      The Negative here is the fact that, the bank becomes the literal owner of the customers property and will take possession of the same at the end of the loan tenure or when the customer passes away. Apart from this, there is no other negative aspect in this reverse mortgage loan.

      Since the benefits are vast and the negatives insignificant, I did not write this explicitly as a drawback.

      Anand

      Delete
    2. Thank you, Anand, for taking the time to respond.
      .
      I agree with you there - That's one negative. I foresee a bunch of risks associated with this. If any of these risks were to materialize the senior will be in a very, very bad position.
      .
      Risks,
      A. Market Risk: If the real estate markets takes a really bad hit & the costs nosedive, the banks will try to reclaim the property sooner since they've already paid for the *now* less-worthy asset.
      .
      B. Health Risk: If the senior develops an ailment for which he/she requires an excessive amount of money in a short period of time, he will no longer be able to pledge or mortgage his asset to get a quick-loan.
      .
      The concept of cashless hospitalization & health insurance may be very well developed in small pockets of big cities in India - but the reach of health insurance companies to semi-urban & rural areas is still *growing* - so the need for cash to cover medical expenses in India is very real. [This is my opinion, I could be wrong].
      .
      C. Tenure Risk: If the senior lives beyond the tenure of the rev-mort, he will be out of his monthly payments & out of a place to live as well. In the USA or most European Socialist societies, the senior will not be left on the streets to rot - but not in Mera Bharath Mahaan [not to denigrate my mother India - only pointing out the sad state of affairs].
      .
      D. Trusting Banks: This may be shocking & even absurd - but I don't trust banks (starting from the Federal Reserve to the RBI to Central Banks to the local credit unions]. Banks are motivated by profit - and the govt-owned ones are motivated only by the greed of the individuals & bureaucrats manning them [again, personal opinion - fallible]. I'd think most banks will try to fleece existing customers - so if real estate prices fall, they'll be quick to account for the fall; whereas if the real-estate prices rise, they will wait for the 5-yr period to account for it.
      .
      Hopefully, our seniors have the skill to identify risks, mitigate them & choose a wise path to augment their monthly incomes.
      .
      Thanks!
      MN

      Delete
    3. @ MN - All these risks are valid and below is my take on the same

      A - Market Risk - The Bank is going to grant a loan of only 60% of the properties current market value and take possession of it after 15 or 20 years. Moreover, this is why the bank will take up a re-evaluation of the property to safeguard its interest. No matter how bad our economy goes, property prices always tend to move upwards if we take a 5 year cycle into consideration. So, this risk is something we can forget about.

      B - Health Risk - This is a risk we will be forced to take. As we are in financial hardships, we have mortgaged our house to make some money. So obviously, not only health risks, but also for any other cash requirements, we can no longer utilize the property. This itself is a quick mortgage to make cash, isnt it? :)

      C - Tenure Risk - Since this loan is available only for citizens who have crossed 60 years of age and the tenure is 15 to 20 years, the chances of the Indian citizen outliving the loan are less than 50%. As with risk B, this is a risk we are forced to take and I agree - this must have been included in the list of negatives in this article. Thanks for pointing it out.

      D - Trusting Banks - Unfortunately we have no option here but to trust these banks. India is one of those countries where Banking Industry is closely regulated by the RBI and any anti-customer policies by banks are quickly addressed. Though banks are motivated by profits or politicos (whoever it may be) they cannot take the customer or his interest for granted. So, lets hope the RBI continues its job of supervising all these banks.

      Yes, hopefully seniors can build their risk mitigation skills and choose the best way to take care of their finances.

      Anand

      Delete
    4. Hi Anand,
      .
      I share your perspectives on A, B & C. I'd reckon seniors to try out a small business that they can perform at their convenience. A small photocopying shop, own a rental call-taxi, et cetera - especially if they're able to move around. I do agree there are risks in any business - and it is JUST NOT THE SAME as rev-mort.
      .
      On point D, I have to disagree with you. Has any govt department done its duty properly in India?
      ... (continued at my blog; Link: "http://viewed-thru-saffron-glasses.blogspot.com/2012/05/india-rbi-trust-them-or-not.html" )
      .
      Respondez s'il vous plait
      .
      Thanks!!
      MN

      Delete
    5. MN,
      Yes, there are numerous options to earn an income for senior citizens but in the cases you mentioned, they need the intervention of another adult to ensure that they are not unfairly treated. In the current economic/political scenario in our country, anyone with strength can easily make the weaker person give-up their rights and senior citizens are especially vulnerable. This Rev Mortgage is a no-nonsense kind of scenario where nobody can interfere in the situation.

      But, as you have said, arranging for multiple sources of income for our post retirement life is one of the smartest things to do and lets hope the next generation of retirees will do the right thing and save up for their post retirement life.

      Reg. Govt Departments - I cannot disagree at this point at all. Anyways, RBI is one of those rare - well performing govt departments. So, lets hope they continue to do so.

      Have left a comment in your blog post as well.

      Anand

      Delete
    6. Hi Anand,
      .
      Thank you for visiting & leaving a comment over at my blog. I've responded in detail there.
      .
      "This Rev Mortgage is a no-nonsense kind of scenario where nobody can interfere in the situation" - I have strong doubts that the banks would compute the fair market price for the property. Similar to predatory loan schemes & credit cards, this rev-mort might prove to be yet another platform for bigger corporations (or PSUs) to abuse us. Moreover the falling value of INR IMHO is not a temporary situation - it is the result of continued corrupt methods being utilized by TPTB (including the P-Notes & other such acts respected & followed by the RBI).
      .
      "RBI is one of those rare - well performing govt departments" - If "well performing" is a subjective term, I'd have to disagree with that. If otherwise, I'd like to learn how one measures the performance of RBI - what are the parameters one uses, how much of it is due to govt acts, rules & politicians & how much is due to the lower-level workers at RBI.
      .
      Thanks!
      MN

      Delete
  2. This is very interesting to know that indian banks are also providing the mortgage loans

    ReplyDelete
  3. Say , If senior citizen have Flat worth 75 lakhs , And think he/she sells that
    for same amount, Now if he/she keep 50lakhs has fixed deposit, and remaining amount
    for daily expenses, In this case How much he/she get monthly interest on fixed deposit ?
    I think ,In that money senior citizen stay happy/safely in rent house ... and Enjoy the rest of the money
    rather just getting 10k per month for 20 yrs ?.. Pls correct me if i'm wrong ?

    ReplyDelete
    Replies
    1. @ Vinay
      You are partially right. Lets say you sell the property and put 50 lakhs in a fixed deposit you will get around 30,000 per month as Interest but there are a few problems here:
      1. The Property is no longer yours and you need to vacate immediately & look for a rented place. In case of Rev. Mortgage you get to stay in the house
      2. The Property value is going to appreciate and by the end of 20 years, there is a very good possibility that you will get some cash in hand even after the bank sells your property to settle its dues

      Do you really think that a senior citizen couple by themselves, moving around from one rented house to another, based on the house owners ideas is a good idea? It is hard enough vacating a house & relocating to a new one with a couple of youngsters to help, imagine how hard it will be for the senior couple to do it by themselves?

      An important point here is that - I never said that this is the best option for senior citizens. It is a very good option. However Yes, this 30,000 is higher than what you will get in a reverse mortgage. So, if you are ok with looking around for a rented place at that age, then this is a good idea too.

      Delete
  4. Please check scheme floated by STAR-DIECHI Insurance Co for reverse mortgage spcly for senior citizens

    ReplyDelete

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