reverse mortgage

Dear Mr.P.K.Gupta,

Hope the following information might be useful for you.

Mortgage

 

A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

 

Mortgage Types

Ø                  Simple Mortgage.

Ø                  Mortgage by conditional Sale.

Ø                  Usufructuary Mortgage.

Ø                  English Mortgage.

Ø                  Mortgage by deposit of title-deeds.

Ø                  Anomalous Mortgage.

 

Flexibility in Repayment of Mortgages

 

Ø                  Low Interest Rate Mortgage

A low interest rate mortgage is the fondest desire of every potential home buyer.

 

Ø                  Adjustable

Adjustable rate mortgages do what you'd expect -the rate 'adjusts'.
It works like this: With a fixed rate mortgage your monthly payments will be the same over the life of the mortgage. You'll always know what you'll have to pay. In contrast with an adjustable rate mortgage (sometimes called an ARM) your payments will change over time. The mortgage payment will be 'adjusted' when the interest rate is adjusted. You can expect the interest rate to be adjusted at regularly.

Ø                  Interest

An "interest-only" mortgage is like a line of credit. You can pay only the interest on the mortgage. This can greatly reduce your payments in time of financial stress. However, it also means that the debt will never be paid off.

Ø                  Fixed Rate

A large majority of people choose the fixed rate mortgage. This mortgage guarantees a certain interest rate for a period of time. The most popular fixed mortgages are 3,4 and 5 years. However, you can have a fixed mortgage for as short as 6 months or as long as 10 years.       

 

 

 

 

Reverse Mortgage

 

Definition

A reverse Mortgage enables older homeowners (62+) to convert part of the equity in their homes into income without having to sell the home, give up title or take a new monthly mortgage payment. The payment stream is “reversed”. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

 

Beginning in America

For many Americans reaching the retirement age, the equity build up in their home is their only real asset. Reverse Mortgage is a way to tap into this asset and create a stream of income needed for retirement or take care of a unexpected financial need that is usually related to health care costs in the elderly. Reverse mortgage is not like a refinance, equity loan or second loan on your home and there are some pitfalls.

 

So what is reverse mortgage? As the term implies the flow of money is reversed. Instead of the homeowner paying the lender on a predetermined schedule, the lender pays the homeowner and there aren’t any payments due until the home owner moves or dies. How did reverse mortgage start?

Roger Maris broke Babe Ruth’s single-season-home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of frame and ironically these acts of kindness remain obscure.

The history of reverse mortgage can be traced to Nelson Haynes of Deering Savings & Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today’s retirees. Reverse mortgage helps many retirees cope with their financial difficulties and more importantly, helps them to have a way to retain their independence and dignity. And retirees are reaching for this solution in record numbers.

 

Presence in other Countries

The scheme of reverse mortgage has been very popular in countries such as the UK, Ireland, the US, Canada and Sweden. In the UK, it has been in vogue for nearly half a century. Known as `Safe Home Income Plans', the plans are fulfilling the rising needs of elderly people at a time of increasing costs of living. More than 50 per cent of the wealth in real-estate owned by Britons aged 65 and above is subject to such mortgages. An estimated 40,000 people in the UK are reported to take up reverse mortgage annually and the UK Financial Services Authority is planning to regulate such services. In the U.S, Reverse mortgages were created in 1987 by the Department of Housing and Urban Development (HUD) to provide greater financial security to American homeowners age 62 and older.

 

BEGINNING IN India

Senior Citizens are an increasing component of the Indian society and dependency in old age is increasing in the country. While on the one hand, there is significant increase in longevity and low mortality, on the other hand cost of good health care facilities is spiraling and there is little social security. Senior Citizens need a regular cash flow stream for supplementing pension/other income and addressing their financial needs.

 

Accordingly, as a welfare scheme the Finance Minister, in his Budget speech in the Union Budget for 2007-08, mooted the concept of reverse mortgage for the elderly. To quote from the document's Paragraph 89: "The National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a `reverse mortgage' under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house through out his/her life time without repayment or servicing of the loan".

 

Pursuant to the announcement made in the Union Budget speech 2007-08, the National Housing Bank (NHB) formulated the Operational Guidelines for Reverse Mortgage Loan, after taking into account the feedback and suggestions of the Senior Citizens, the public and the Technical Working Group constituted by NHB, in this regard.

 

 

 

Presence of Reverse Mortgage in India

The concept of reverse mortgage has gained momentum in India with the Finance Minister P Chidambaram giving his nod in the Union Budget for 2007-08.  Subsequently, the National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), released draft norms of reverse mortgage. This had led several banks to announce their intentions to launch reverse mortgage schemes. Taking the lead has been ICICI Bank, followed by Punjab National Bank (PNB) and Bank of Baroda (BoB), all three having announced reverse mortgage schemes aimed at senior citizens. PNB is the first public sector bank to come out with the Reverse Mortgage Loan scheme called 'PNB Bagbaan' on the occasion of Baisakhi, April 13 across the country. Other banks like Allahabad Bank, Oriental Bank of Commerce and Corporation Bank have expressed their intention to follow the lead. Even Dewan Housing introduced the scheme under the name ‘Saksham’.

The guidelines on reverse mortgage have been announced by National Housing Bank, the nodal agency for mortgage finance.

 

 

 

 

 

                                                              

 

Concept

Reverse Mortgage is a mortgage loan for Senior Citizens (over 60 years of age) who today, generally are not eligible for any form of mortgage loan. Conceptually, Reverse Mortgage seeks to monetize the house as an asset and specifically the owner’s equity in the house. The scheme involves the Senior Citizen borrower(s) mortgaging the house property to a lender, who then makes periodic payments or lump sum payments to the borrower(s) during the latter’s lifetime. The Senior Citizen borrower is not required to service the loan during his lifetime and therefore does not make monthly repayments of principal and interest to the lender.

 

On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrower(s)/heir(s) can also repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property. Reverse mortgages are one product within the “Equity Release” category.

 

Further, the Reverse Mortgage Loan is very beneficial for the Senior Citizens in the following ways;

  i.                  Enables the Senior Citizens owing a house but having inadequate income to meet their needs.

ii.                  Enables them to meet unexpected lump sum expenditure needs such as renovation/ repairs to house, hospitalization etc.

iii.                  Borrower owns and occupies the home till demise or changes residence. Even after demise, the spouse can continue to stay until demise. If spouse is co-borrower, then will continue to receive payment (upto 15 years from the grant of loan).

iv.                  Payment received from a Reverse Mortgage is considered as ‘loan’ and not ‘income’ from the tax angle in many countries.

v.                  Reverse Mortgage can be a partial substitute for a Social Security Scheme for Home owning Senior Citizens.

vi.                  Will also be of great help to Senior Citizens who have no/ unwilling family to support them.

 

How The Scheme Works

 

Two options for the elderly

 

Age Group	Choice – 1	Choice – 2
	Loan Amount (in Rs.)	Monthly Payments (in Rs.)
62 – 70	45,00,000	31,000
71 – 75	50,00,000	34,000
76 – 80	55,00,000	38,000
Above 80	60,00,000	41,500

                                                      

In UK, the scheme is available to the persons aged 62 years or more. In the scheme, being conceptualized, a senior Citizen of 62 years or more, who owns a house, can be given loan upto a fixed amount worked out on the percentage basis of the market value of the house owned and given on mortgage. The scheme can be implemented as shown in table, in regard to a house of the value of Rs. 1 Crore. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contrasting Reverse Mortgage From Traditional Mortgage

In a traditional mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (equated monthly installments), which comprise of both principal and interest amounts. The property is utilised as a security to cover the risk of default on the borrower's part.

 

In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not have regular income, can mortgage the same with the lender (a scheduled bank or a housing finance company-HDFC).

 

In return, the lender makes periodic payment to the borrowers during their lifetime. In spite of mortgaging the house property, the borrower can continue to stay in it during his entire life span and continue to receive regular flows of income from the lender as well. Also, since the borrower doesn't have to service the loan, he need not bother about repaying the 'borrowed amount' to the lender.

 

Further, the following chart carves out the difference between both the forms of mortgage based on certain factors;

 

 

 

 

ITEM	REVERSE MORTGAGE	TRADITIONAL MORTGAGE
Purpose of loan	For Senior Citizens, to release the equity in the home and use the proceeds to live a more comfortable, stress-free, retirement	For any person, to purchase or refinance a home
Before loan closing, you have	Substantial equity in the home	No or little equity in the home
At loan closing, you	Owe very little and have substantial equity	Owe a lot, and have little equity
While the loan is outstanding,	You receive payments from the lender Loan balance rises Equity declines	You make payments to the lender Loan balance goes down Equity grows
At the end, you	Owe whatever amount was borrowed, plus accrued interest Have much less, little, or no equity	Owe nothing Have Substantial Equity
Final analysis	Rising Debt-Falling Equity Loan Program	Falling Debt-Rising Equity Loan Product

 

 

 

 

 

 

 

Role of National Housing Bank (NHB) & its guidelines on Reserve   Mortgage

The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. In terms of the National Housing Bank Act, 1987, National Housing Bank is expected, in the public interest, to regulate the housing finance system of the country to its advantage or to prevent the affairs of any housing finance institution being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the housing finance institutions. For this, National Housing Bank has been empowered to determine the policy and give directions to the housing finance institutions and their auditors.

 

Pursuant to the announcement made by the Hon'ble Finance Minister in the Union Budget Speech 2007 – 2008 regarding Reverse Mortgage Loan, (RML), NHB has issued the Final Operational Guidelines for Reverse Mortgage Loans on May 31, 2007. Wherein they have provided in detail the guidelines pertaining to various issues such as eligible lenders, eligible borrowers, determination of eligible amount of loan, nature of payment, eligible end use of fund, maximum period of loan etc. The said Operational Guidelines is also available on the NHB website i.e. https:/nhb.org.in/Financial/Reverse Mortgage_ Operations_Guidelines.htm.

 

Some of the basic features of the reverse mortgage loan as per the NHB Operational Guidelines are as follows;

i.                    Reverse Mortgage Loans (RMLs) are to be extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB.

ii.                    Borrowers should be Senior Citizen of India above 60 years of age. Married couples will be eligible as joint borrowers for financial assistance.

iii.                    Borrower does not require an income to qualify for reverse mortgage loan. However, borrower should be the owner of a self- acquired, self occupied residential property (house or flat) located in India, with clear title indicating the prospective borrower’s ownership of the property.

iv.                    The residential property should be free from any encumbrances and the residual life of the property should be at least 20 years.

v.                    The amount of loan will depend on market value of residential property, as assessed by the PLI, age of borrower(s), and prevalent interest rate.

vi.                    The nature of payment of loan can be any or a combination of; periodical payments, lump-sum payments or committed Line of Credit.

vii.                    The loan amount can be used for up-gradation or renovation or extension or maintenance etc. of residential property, medical or emergency expenditure for maintenance of family. Also the loan can be taken for supplementing pension/ other income, repayment of an existing loan taken for the residential property to be mortgaged or meeting any other genuine need.

viii.                    The loan can not be taken for speculative, trading and business purpose.

ix.                    The maximum period for which the loan can be taken is 15 years.

x.                    Loan shall be secured by way of a mortgage of residential property; on the other hand commercial property will not be eligible as security for the loan.

xi.                    Borrower will remain owner of the property throughout the period of the loan.

xii.                    Borrower will be responsible for paying property tax, house insurance premium etc.

xiii.                    The residential property which stands as security for the loan is required to be revalued at least once every five years.

xiv.                    The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home or permanently moves out of the home for aged care to an institution or to relatives.

xv.                    Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Residential Property.

xvi.                    The borrower(s) or his/her/their estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.

xvii.                    A reasonable amount of time, say up to 2 months may be provided when RML repayment is triggered, for house to be sold. The balance surplus (if any) remaining after settlement of the loan with accrued interest shall be passed on to the estate of the borrower.

xviii.                    The borrower(s) will have option to prepay the loan at any time during the loan tenor. There will not be any prepayment levy/penalty/charge for such prepayments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Implications of Reverse Mortgage

Since reverse mortgage is a new concept introduced in India only by Budget 2007, the tax treatment of the same is still unclear. The National Housing Bank has written to the Income-tax Department, conveying concerns of banks and their customers on a few issues relating to the treatment of loans from reverse mortgage arrangements under the Income-tax laws. Further, S Sridhar, Chairman and Managing Director of NHB, informed the Business Standard, that the NHB has approached the authorities at the Centre on the issue of exempting reverse mortgage from taxation as it is the senior citizens who benefit, apart from developing reverse mortgage as commercial product.

 

However, the Income-tax Department till now has not issued any clarification or notification in regard to the tax treatment of the reverse mortgage loan.

 

With the government still unclear about the final tax treatment of the periodic payments received by the borrower under a reverse mortgage scheme, many banking companies and especially the senior citizens (users for the product) are in a state of dilemma. Further the Bankers are also in confusion on the taxability of income earned from interest accrued on the monthly payments which is booked as income. The Bankers wants to pay the tax on the said income only when the property is monetized and the interest actually earned.

 

The tax aspects of a product constitute an indispensable factor in judging its viability. Therefore, it is the need of the hour to simplify and clarify the doubts as to the tax treatment of the reverse mortgage loan which is gaining momentum in India.

 

Now in the absence of any special rules or regulations regarding the taxability of reverse mortgage loan, let us analyse the various tax implications. The incident of tax under the reverse mortgage loan could be on three types of assessee namely the borrower, lender/ banker and the successor of the borrower (“successor”). Further the tax implication may arise under various tax laws such as income-tax, wealth tax, property tax. Let us analyse the position according to the assessee.

 

Firstly, for the borrower, the tax implications are as follows:

 

1.                  Under the Income Tax Act, 1961;

1.1.            The first issue, incases where the option for payment in installments is preferred, is whether the monthly installments received by the borrower be treated as income for the purpose of Income Tax Act, 1961. On perusal of the definition of ‘income’ provided under section 2(24) of the Income Tax Act, 1961, it is clear and obvious that such payments though being paid in installments are nothing but in nature of loan and therefore can not be said to be income. Accordingly, no income tax can be charged from the borrower on receipt of such payments in installments.

 

1.2.            The Second issue would relate to capital gain in regards to the creation of mortgage for such loan. It is comprehensible that no liability for capital gains would arise when the property is mortgaged, because a mortgage is not considered as `transfer' within the meaning of this term as given in Section 2(47) of the Income Tax Act, 1961.

 

1.3.            The other issue which may arise is whether the borrower can take any tax advantage of the interest paid on reverse mortgage under the head ‘income from house property’. It is being made clear that a borrower may, as per the final operational guidelines issued by the NHB, take loan for the purpose of up gradation, renovation or extension of residential property or improvement apart from other purposes. In such cases of borrowings, as per Section 24 (b) of the Income Tax Act, 1961, the interest paid on the borrowed capital shall be allowed as deduction from the income under the head ‘income from house property’. Because Section 24 (b) allows deductions of amount of any interest payable on a capital borrowed for the purpose of repair, renewal or reconstruction. However as per this section the total amount of deduction can not be more than Rs. 30,000.00 incase where the borrower is in the occupation of the house which is the subject matter of loan for the purposes of repair and renovation of his own residence. Whereas if the loan is taken for the purpose of extension of the house property, the deduction allowed will be upto Rs.1,50,000.00.

 

Further in circumstances where the loan is taken up for any purpose other than as listed above, then the borrower shall not be eligible for any deduction U/s 24 for the head ‘income from house property’ as the loan is not taken for the purpose of acquiring, constructing, repairing, renewal or reconstruction of the house property.

     

1.4.            Further issue which may arise in regards to tax advantage on the payment of the interest for the reverse mortgage loan is, whether such amount paid will qualify as cost of acquisition for the purpose of capital gain at the time of sale by the borrower. It is obvious that reverse mortgage loan cannot be taken for the purpose of acquiring any property, accordingly any interest paid on such loan can not be included in the cost of acquisition for the purpose of capital gain. However, if the reverse mortgage loan is taken up for the purpose of up gradation, renovation or extension of the residential property, any interest paid on such loan may qualify as cost of improvement and be deductible for the purpose of capital gain.

 

2.                  The payment of any property tax, municipal tax etc whether to be the liability of the borrower or the lender - As per the Final Operational Guidelines issued by the NHB and the various schemes of the banks in regards to the reverse mortgage loan, it is made clear that the borrower shall remain the owner of the property until his/her death and also that the liability to pay any property tax or insurance in respect of the property shall be of the owner. Accordingly, the borrower and not the lender will be liable for payment of any property tax or municipality tax of the property.

 

3.                  Under the Wealth Tax Act, 1957 – As the borrower remains the owner of the residential property which is the subject matter of mortgage under the reverse mortgage loan, the same property shall qualify as an asset under the definition provided under Section 2 (ea) (i) of the Wealth Tax Act, 1957. However, the borrower can take advantage of the exemption provided under Section 5 of the Act, wherein one house belonging to the assessee is exempted from the payment of wealth tax.

 

Secondly, for the lender/ banker, the tax implications are as follows:

 

1.                  Under the Income Tax Act, 1961 – The lender/ banker shall be liable to income tax, under the head ‘income from business and profession’, for the receipt or accrual of any interest income arising out of the reverse mortgage loan given by the bank. Generally in the reverse mortgage the banker receives or recovers the amount of loan along with accumulated interest after a long time from the date of disbursements. The issue arises particularly in the case where the bank makes the monthly payment in respect of the reverse mortgage loan.

 

For example: Punjab National Bank under the scheme ‘Bagbaan’, for a qualifying loan amount of Rs. 1.00 lac for a period of 10 years, gives only Rs.490 per month to the borrower for 10 years, instead of giving Rs.833 per month which will be the actual equal monthly installment for distributing a amount of Rs 1 lac over 10 yrs. So, the discounted amount i.e. Rs. 343 (Rs.833 – Rs.490), is nothing but the interest deducted by bank.

 

Now, the interest accrued on such loans is booked as income, but banks want to pay tax on it only after the interest is earned from the property. On the legal analysis of this particular transaction it is clear that banks, in the absence of any specific exemption provided under the Income Tax Act or Rules, will have to pay the income tax on such accrual of interest income as they follow the mercantile system of accountancy. However, in the case where the bank lends money in a lump-sum one time payment against the reverse mortgage loan, the interest in this case accrues or become due only after 15 years from the date of loan.

 

Finally, for the Successor of the borrower, the tax implications are as follows:

 

1.                  Under the Income Tax Act, 1961 – In a reverse mortgage loan, after the death of the borrower, his/ her successor(s) have the first right to settle the loan and only on his/ her failure to settle the loan in a given stipulated time period the bank can sell the property to settle the loan and otherwise not. So, the taxability issue arises when the successor exercise’s the option to settle the loan and thereby pays the whole outstanding loan amount along with accumulated interest. Further, the issue in such case arises for the successor when he/ she make’s a transfer of the property and capital gain tax is attracted on such transfer. The issue will be whether the said loan amount paid by the successor to the bank, i.e. the mortgagee, in order to release the estate property from mortgage, qualify as cost of acquisition for the purpose of capital gain and hence deductible. This issue to an extent can be settled by observing the apex court’s decision in the matter of R.M.Arunachalam v. CIT 227 ITR 222, which was also followed by the apex court itself in the decision of V.S.Malhotra v. CIT 227 ITR 140, wherein the apex court has held that that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagor's interest in the property and by discharging the mortgage debt he acquires the mortgagee's interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagee's interest in the property which is deductible as  cost of acquisition under section 48 of the Act. 

 

Therefore on following the apex court’s judgment it is clear that the payment made by the successor in order to settle the loan amount along with the accumulated interest will be included in the cost of acquisition for the purpose of capital gain and the same may be allowed as deduction for the purpose of calculating the capital gain tax.   

 

  

                            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risks TO FINANCIAL Institutions

 

Mortality Risks

This is the risk that an RM borrower lives longer than anticipated. The lender might get hit both ways: he has to make annuity payments for a longer period; and the eventual value realised might decline. However, this risk is usually ‘diversifiable’, if the RM lender has a large pool of such borrowers. Possibility of adverse selection (of predominance of relatively healthier borrowers) is counterbalanced by the possibility that even borrowers with poor health may be attracted by RM’s credit line or lump sum options.

 

However, there is no literature on one possible source of systematic risk. Since RM is projected to substantially improve the monthly income and/ or liquid funds of the RM borrowers, would it not itself result in a systematically higher life expectancy amongst them than otherwise? Perhaps this lacuna is due to the relatively short experience with RM so far.

 

Interest Rate Risks

Given that the typical RM borrower is elderly and is looking for predictable sources of income/ liquidity, RM loans promise a fixed monthly payment / lump sum / credit line entitlement. However, for the lender, this is a long-term commitment with significant interest rate risks.

 

While fixing the above, the lender has to account for a risk premium and thus can offer only a conservative deal to the borrower. This interest rate risk is not fully diversifiable within the RM portfolio.

 

Most of the RM loans accumulate interest on a floating rate basis to minimize interest rate risks to the lender. However, since there are no actual periodic interest payments from the borrower, these can be realized only at the time of disposal of the house, if at all.

 

Property Market Risk

This risk may be partly diversifiable by geographical diversification of RM loans. However, property values may be a non-stationary time series.

 

Others have pointed out additional aspects of these risks:

 

Ø                  RM can be considered as a package loan with a ‘crossover’ put option to the borrower to sell his house at the accumulated value of the RM loan at the (uncertain) time of repayment. If this option can be valued, it can be

 

Ø                  suitably priced and sold in the market. However, unlike in the case of forward mortgages, markets for resale, securitization and derivatives based on RMs are non-existent or non-competitive. Small market size and predominance of government backed RM insurance may dissuade potential entrants [11, 9]. This impedes the flow of funds to finance RM loans.

 

Ø                  For the lender, both the interest and any shared appreciation component added to the loan balance are taxable as current income even though there is no cash inflow [11,12]

 

Ø                  RM loans found takers amongst lenders only after the availability of default insurance under the HECM programme. Even then, in most of the RM loans, interest accumulates at a floating rate linked to one-year treasury rates. Boehm and Ehrhardt [12] illustrate why. Basically they demonstrate that

 

Ø                  A fixed interest rate RM carries an interest rate risk several orders of magnitude higher than a conventional coupon bond or regular mortgage. It could be especially high at origination (as many as 100 times) and continues to be higher throughout.

 

Ø                  The small initial investment under an RM is very deceptive. RM creates very large off-balance sheet liabilities, if market rates rise above the rate assumed under RM.

 

Ø                  If interest rate risk is also incorporated into capital adequacy norms, this will mean disproportionate (to current asset value) additional capital commitments to support RM lending

 

Ø                  This is because the typically small RM loan value at origination is essentially the difference between the value of a relatively long duration asset (loan repayment) and a relatively shorter duration annuity liability.

 

Ø                  Compared to a fixed interest RM that is non-callable by the borrower, a callable RM carries very high risks for the lender. The fact that most of the RMs accumulate at floating rates and that fresh RM loans involve significant upfront costs mitigate this risk considerably [9]

 

     

 

 

 

 

 

 

 

 

Sources of Income Support for the Elderly in India

 

As of 1994, the estimated percentage among the elderly, dependent on various sources of income was as follows:

 

 

Source	Men	Women	All Elderly
Pensions/Rent	9-10%	5%	7-8%
Work	65%	15%	40%
Transfers Of which, from Children	30% 22%	72% 58%	52% 40%

 

In addition, as per a survey of the National Sample Survey Organization (NSSO) in 1994, less than 4% of the elderly lived alone. A 1995-96 National Sample Survey of the elderly reported that about 5% of them lived alone, another 10% lived with their spouses only and another 5% lived with relatives/ non-relatives, other than their own children. In other words, co-residence with children and other relatives is predominant.

 

However, the following aspects are worrisome:

 

Ø                  The extent and adequacy of support, especially for widows

Ø                  Vulnerability of such support to shocks to family income

Ø                  As incomes and life expectancy rose in the now developed countries, simultaneously there was a decline in co-residence rates and intergenerational support. It may happen in India too

 

Ø                  Strains due to demographic trends seem inevitable: fewer children must support parents for longer periods of time. In a recent survey covering 30 cities, 70% of the respondents did not expect their children to take care of them after retirement.

 

Ø                  Job related migration of youth within the country and emigration.

 

 

Table 1 projects the elderly population in the coming decade. It shows that the current level of nearly 7 per cent of the population (around 75 million) is expected to move up to 9 per cent of the population in another ten years.

 

The state's ability to provide any generalised social security is non-existent, since it is not in a position to meet the pension obligation of its own employees. The savings of most of the middle-class is inadequate to provide for their old age, particularly for the widows. In such a context, it is imperative to think of innovative solutions taking into account our own ethos and cultural specificities. Housing and gold are the two major assets that the middle-class owns. Even the poor own the latter in small quantities as ornaments.

 

 

 

 

 

 

 

 

 

 

 

 

 

Suggestion

 

The reverse mortgage products in USA and UK are popular and the Government has exempted it from tax as it was meant to help the Senior Citizens with a regular flow of funds to sustain them during old age. So, in my opinion, the Indian Government should also follow the suit, otherwise taxes would take away a major part of the income of the borrowers. Moreover, since the scheme is targeted at senior citizens, there has to be an element of relief for them and it should be emphatically and strategically used by the Financial Institutions to tap the growing demand in the budding stage of Reverse Mortgage market.

 Best Regards

 

Daksh