In the absence of a regular income and meagre pension, senior citizens may find themselves in a tight cash position. In the absence of a regular income, bank and financial institutions are also not willing to lend.
In such circumstances, senior citizens who own some property can look at reverse mortgage (RM). This product was launched first by Dewan Housing in August 2006. Since then, many others such as Punjab National Bank, Union Bank of India and State Bank of India have introduced this product.
Recently, National Housing Bank, in association with Central Bank of India and Star Union Dai-ichi Life, introduced a product — Cent Swabhiman Plus — with two options. Under the first option, the purchase price will not be returned, and in the second, it will be returned.
The product is quite an improvement over other products, because it is backed by an insurance company. A reverse mortgage loan-enabled annuity (RMLeA) is a plain vanilla reverse mortgage loan linked to a life insurance scheme. The customer gets income for a lifetime on a monthly, quarterly and half-yearly basis.
RV Verma, executive director, National Housing Bank, said, “The bank passes on around 50-60 per cent of the property value to the insurance company as a lumpsum. And the insurer makes regular payments to the beneficiary through the bank.”
According to a National Housing Bank note, citizens aged between 60 and 70 will get up to 60 per cent of the property value. Those between 70 and 80 years will get up to 70 per cent and those above 80 will get up to 75 per cent of the value.
The plain vanilla reverse mortgage loans pays the borrower a fixed sum every month for a fixed period — 20 years or till the demise of the borrower, whichever is earlier.
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Also, the income or annuity received through this product will be higher than the income from a regular product. “The insurance company invests the money and optimises the benefits for the borrower, so the monthly annuity is around 25-30 per cent more,” said Verma.
The rate of interest for RMLeA is fixed at 9.50 per cent. “The rate of interest charged varies from bank-to-bank. It is slightly higher for this product, around 0.5-1 per cent,” said Verma.
However, if one opts for the return of purchase price, annuities are significantly lower. For instance, if a 65-year-old mortgages a property of Rs 10 lakh, the monthly income will be Rs 3,737 (for no return of purchase price). If the person wants to be returned the purchase price, the income falls to Rs 2,267. In comparison, a property of Rs 10 lakh will fetch a monthly income of 2,250 for 15 years from SBI.
Under this product, the income being annuity-based is taxable. The regular reverse mortgage loan is tax-free. “For the regular product, the income is treated as a loan and, hence, is tax-free. But, for the new product, the annuity is treated as salary and is taxable,” said Verma.
Financial planners said though it was quite an improved version of the regular reverse mortgage plans offered by other banks, the product needed to evolve further to make it a prime choice for senior citizens.