Friend of the elderly

HELPING HAND

The FM has won a few more friends by declaring that money received from reverse mortgage will not be treated as 'income' by tax authorities.

In the 2007-08 Budget, Finance Minister P Chidambaram declared that the National Housing Bank would come out with specific guidelines for reverse mortgage for the retired.

PRODUCT FACT SHEET

Individuals ABOVE 60 are eligible for the product

Period of loan can be a maximum of 15 YEARS

The amount of loan will vary between 40-60 PER CENT of the ASSESSED VALUE of the product

Dewan Housing, Punjab National Bank, State Bank of India, Bank of Baroda, Allahabad Bank, Indian Bank, Axis Bank and LIC Housing Finance have INTRODUCED THE PRODUCT so far

Interest rates vary: institutions REVALUE PROPERTY EVERY FIVE YEARS

THE CHANGES

Payments received from banks will not be TREATED AS INCOME but as A LOAN

SENIOR CITIZENS will own the property during the loan's tenure and there is no 'TRANSFER' to the lender

Reverse mortgage, essentially, is a product whereby a senior citizen over the age of 60 years can unlock the value of their house by mortgaging it to a bank or housing finance company.

The financial institution, in its part, pays a regular equated monthly instalment (EMI) to the person, based on the valuation of the home.

However, despite the fact that many banks and housing finance companies introduced this product in the financial year 2007-08, only 150 people have actually opted for the product. The reason: the money that went to the people was considered as 'income' at the hands of the senior citizen. This major anomaly has been fixed in the Union Budget 2008-09.

By treating cash received from banks and financial institutions as a loan, the finance minister has cleared the ambiguity surrounding the reverse mortgage loan product.

The basic idea of introducing such a product was to help senior citizens, who find it difficult to meet expenses. Also, in spite of owning a house, the fact that they stay in it, does not allow them to earn anything on it. In the absence of any social security in India, it makes great sense to have a product where the person can earn a regular income.

Dewan Housing Finance, which was among the first off the block (in fact, even before the Budget proposal in 2007-08), with a reverse mortgage product has so far generated about just about 500 queries, hopes that the current clarification will go a long way in boosting this product.

Says Shivkumar Mani, head, marketing, Dewan Housing, "The clarification that there will no tax implications at the hands of the borrower will help make the scheme popular, as this was the key reason for seniors not opting for the product."

The second confusion on the product was about the legal title. By stating that the reverse mortgage will not amount to transfer, the Budget has made clear that the senior citizen will continue to be the owner of his house till the tenure of the product.

Of a population of 80 million senior citizens, it is estimated that about 45 million are eligible for this product. Mani predicts that with this proposal banks and financial institutions will be able to issue many more reverse mortgage loans in the financial year 2008-09.

Financial planners believe that the clarifications will help sort out the doubts. However, the more important problem that ails reverse mortgage products is the lack of awareness and poor marketing.

"With more institutions introducing the product, the number of loans issued in this category should go up," says one planner.

There are other issues as well that will need to be ironed out in the days to come. For instance, in countries like the US, such products are bought for the entire life of the person and in many occasions, the entire life of the spouse as well. In India, this product is only for 15 years, thereby raising fears of 'what would happen, if the person outlives the tenure'.

Further, there are issues with the valuation of the property, which will be done every five years. This may lead to fall in the valuation, if the property is not maintained well and lead to fall in the EMI. There are clauses in the document where the senior citizen has to make sure that the mortgaged property is well-maintained.

On the whole, while the FM has taken a few steps in the right direction, a lot more needs to be done to make this product really friendly for the elderly.