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Central Bank of India plans to launch a mortgage product, a combination of home and reverse mortgage loans. The public sector bank has applied to the Reserve Bank of India and the National Housing Bank for approval, says Ram Sangapure, general manager, retail banking.
The tenure for the product would be 20 years or more, of which the initial 10 years would be a normal home loan. After that, it could be converted into a reverse-mortgage product. After the first 10 years, the borrower has various options to pay, such as paying off the entire loan with the proceeds he gets at the time of retirement, repaying part of the loan and converting the rest into a reverse-mortgage loan or converting the remaining dues into reverse mortgage.
In a reverse mortgage, a homeowner can borrow money against the value of his or her home. The target segment for the product would be customers close to retirement and finding it difficult to get a normal home loan. Normally, banks prefer to give loans where the tenure ends while the borrower is still in service, earning a salary. This is because the repayment capacity could decline after retirement.
Explaining the rationale behind the product, Sangapure says, "Many customers buy houses at the beginning of their careers, when they are not eligible for a big-ticket loan. Later on, when they want to upgrade to a bigger house, they find banks not ready to give them loans, since they are close to retirement. That is why an option to convert the loan into a reverse mortgage will be attractive. That way, they can continue to stay in their house and earn a certain annuity from the reverse mortgage, which can also take care of expenses post-retirement." The rate of interest would be the same as the bank charges for its home loans.
The Central Bank of India was the first bank to offer reverse mortgage. Currently, it has a portfolio of Rs 115 crore. The bank is hopeful the proposed combo product would appeal to people more than a basic reverse-mortgage loan, which has not found many takers, since it was launched in 2007. Most public sector banks offer reverse mortgage and so do some housing finance companies. It was envisaged as a product to help senior citizens with no source of income, but have a property in their own name. But the caps on the loan amount and tenure have worked against the product.
A reverse mortgage is available only to those above 60 years of age. The property being mortgaged should not have any loan against it. After mortgaging the loan with the bank, the borrower would be paid part of the amount as a lump sum and the rest in regular monthly or quarterly payments. If this regular payment, or annuity, is made by the bank, then there is no tax on it. But in some cases, the bank ties up with an insurance company to provide annuity to the borrower. In such cases, there is a tax on the annuity.
"A proposal to do away with this tax is under consideration," says Sangapure.
If the annuity is paid by the bank after the completion of the 20-year tenure, the borrower would have to either repay the loan or surrender the property to the bank. If the annuity is paid by the insurance company, the borrower could continue staying even beyond the 20-year tenure and the bank would take over the property only after the borrower's death.
Since the maximum tenure allowed for a reverse mortgage is 20 years, it means that if you take the loan at the age of 60, you will get payment only till the age of 80. The maximum loan amount allowed is up to 60 per cent of property value. This means, if your property is valued at Rs 1 crore, you would get only Rs 60 lakh. Given that average life expectancy has increased and living costs have gone up, at least in cities, this amount might not be enough for senior citizens, especially if they have no other source of income. That is the primary reason for the product not picking up, according to experts.
Sangapure also says banks don't usually give loans of more than Rs 1 crore, which could be a drawback in cities such as Mumbai and Delhi, where property prices are high.
Another reason for the product not having caught on is that Indians have a lot of emotional value attached with their properties, says Nitin Vyakaranam, founder and CEO, ArthaYantra. "The concept of living on credit is still alien to most Indians. Besides, there is no inheritance or estate tax in India. So, people prefer to pass on their properties to their legal heirs," he says.
