Too little for comfort

PRODUCT ANALYSIS: Yet another reverse mortgage product for the elderly, which they can opt for, only in dire need.

Since the last two years, a large number of banks and financial institutions have introduced the reverse mortgage product for the elderly.

This product is supposed to help senior citizens, who want to unlock the value of their house, by mortgaging it to a bank for a monthly payment. In other words, it is an option for the asset-rich, yet cash-insufficient, to meet regular expenses and increased healthcare requirements.

This product was first launched by Dewan Housing in mid-2006. However, after the announcement in Budget 2007-08, a large number of banks such as, Punjab National Bank, State Bank of India and Axis Bank have launched them. The latest to join this list is Union Bank of India (UBI), which has launched it recently.

The basic criteria is that citizens should be 60 years old and above to opt for this product. Also, monthly instalments for a maximum of 15 years would be paid to them for mortgaging their self-occupied residential property.

However, there are some conditions. For one, the residual life of the property should be at least 20 years. Also, the property will be valued after keeping a margin of 30 per cent on the assessed value of the property.

This means a property worth Rs 70 lakh will be valued at Rs 49 lakh. Accordingly, the payout will be Rs 11,222 per month for 15 years.
 

SNAPSHOT
Value of Property (Rs)	Monthly Payout (Rs)
10,00,000	1,689
20,00,000	3,378
30,00,000	5,067
40,00,000	6,756
50,00,000	8,445
60,00,000	10,133
70,00,000	11,822
80,00,000	11822*
90,00,000	11822*
1,00,00,000	11822*
* Since the maximum loan amount under Union Reverse Mortgage is restricted to Rs 50 lakh, the monthly payout will remain the same on property valued Rs 70 lakh and above

The maximum value considered under this scheme for the purpose of payout is Rs 50 lakh, after keeping a margin of 30 per cent on the assessed value of the property. The processing fee is 0.5 per cent of loan or Rs 10,000, whichever is lower.

Any other expenses incurred for, or on behalf, of the borrower will be charged on an actual basis. The rate of interest is 10 per cent. The property price and the payout will be reset, once in five years.

The good part is that both the spouses get the advantage of staying in the house for the entire lifetime. That is, even if one passes away, the other can continue to live in the house for his/her lifetime. With the Union Budget clarifying that the income generated through reverse mortgage is not taxable, it makes life easier for senior citizens.

Additionally, if the couple or the spouse were to live beyond the payout period, they are not required to make monthly repayments. On the death of the borrower, the loan becomes due and payable, only six months after the incident.

The loan has to be repaid, along with accumulated interest, through sale of the mortgaged house. If the borrower's heir is interested in the property, he/she have the option of repaying the loan with accumulated interest. The mortgage will be released without resorting to sale of the property.

However, there could be some problem on the 'remaining life of the property' clause. If the property has been purchased in youth, its residual life could be much less. Also, in terms of other costs, the borrower is expected to maintain the property in good condition.

The house property is required to be insured by the borrower against fire, earthquake and other calamities paying the premium from his own pocket. The borrower also needs to pay all taxes and charges on time. In case, he fails, the bank may pay it by reducing the loan amount to that extent.

For senior citizens, this is another choice to get some supplementary income from the asset. Looking at the valuations and payout, it is clear that there is no way that anyone can depend on this income for sustenance. In other words, resort to reverse mortgage products, only in dire need.