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|REVERSE MORTAGE FOR ELDERLY CITIZENS- SALIENT FEATURES & PROVISIONS By Dr. A. M. Sherry|
Government’s efforts to help elderly people (hereinafter refereed to as “Senior Citzens”). The elderly people in any country are the most valuable treasure of a society, who have served the country in various capacities in the fruitful years of their lives and are nowin the evenings of their lives. With vast improvements in living styles, rapid developments in medical and information technologies, life spans have increased and this is amply borne out by the last census figures. With average age of the citizens in the country having gone up substantially since independence and in the background of the fact that it is improving year by year persons deriving income from pension and other elderly ones constitute a significant segment of population. However, there is no all pervasive social security scheme, as it is inUSA and some other countries,whichmay take care of such person in regard to their medical and other necessities in a systematic and organizedmanner. Hence,many of them face varied problems-most important of them has been the cash crunch.
Many such persons, as the media report show, are even disowned and discarded by their children, who do not give any financial support and therefore, because of limited incomes have to lead a miserable life despite their owning houses,where they are living of considerable values. House rich cash poor is the predicament in which many such persons have to live. What they need, besides a residential house, is sufficient cash too for meeting their needs. The present Prime Minister of India, when he was the Finance Minister in early nineties, while presenting the budget for the year 1993-94, expressed his concern about the need for help to elderly in the followingwords:- India will shortly become home to the second largest number of elderly persons in the world. The population of our elderly, at present estimated at 76 million, is expected to increase to 100 million in 2013.
The interest of the pensioners and senior citizens are, therefore, a particular responsibility of theGovernment . Even in later years, concern about the old aged citizens was shown by Shri Yashwant Singh, while presenting the budget for the year 2004-05. In para 7.4 of the budget speech, his observations concerning such persons were to the following effect:- I .do not propose to make any change in the existing rates of interest on small savings instruments. Consequently, PPF, GPF and special deposit scheme will attract 8% interest this year. For senior citizens, I propose to introduce a new scheme called :The Senior Citizens Saving Scheme . Offering an interest rate of 9%p.a.
The concern for elders was further taken care of when Shri P.Chidambaram while presenting the budget for the year 2007-08 where he made the following announcement vide his budget speech. 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 house, can avail of a monthly stream of income against the mortgage of his/her house while remaining the owner and occupying the house though out his/her lifetime without repayment or servicing of the loan. [para 89] 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 mortgaging the house property to a lender bank, who then makes periodic payments to the Senior Citizen during the lifetime. An elderly people is not required to pay back the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender bank. The Senior Citizen will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive or permanentlymove out of the property or Cease to use the property as permanent primary residence. 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 releasedwithout resorting to sale of the property. A person above 60 years of age. Joint borrowers are also eligible if they are married couples and one of them is senior citizen. They are the owner of a self- acquired and self occupied residential property in India,with clear title In case the residential property is already mortgaged to any other institution, the bank may, use of part proceeds of Reverse Mortgage Loan (RML) to prepay/repay the existing housing loan. The loan amount will be paid directly to that institution to the extent of the loan outstanding with that institution with a view to release themortgage.
The remaining life of the property isminimum20 years. The Senior Citizen using that residential property as permanent primary residence. The loan amount cannot be used for speculative, trading and business purposes.
Only this can utilized for the following purposes- Upgradation, renovation and extension of residential property. For uses associated with home improvement, maintenance/insurance of residential property Medical, emergency expenditure for maintenance of family For supplementing pension/other income Repayment of an existing loan taken for the residential property to bemortgaged Meeting any other genuine need The amount of loan will depend on market value of residential property, as assessed by the Primary Lending Institutions (PLI), age of borrower(s), and prevalent interest rate however the table given hereunder may serve as an indicative guide for determining loan eligibility : 60 65 40% 66 70 50% 71 75 55% Above 75 60% The PLIs will need to re-value the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state etc. Such revaluation may be done at least once every five years, the quantum of loan may undergo revisions based on such re- valuation of property at the discretion of the lender. Any or a combination of the following:
1) Periodic payments (monthly, quarterly, half-yearly, annual) to be decided mutually between the PLI and the borrower upfront
2) Lump-sumpayments in one ormore branches
3) Committed Line of Credit, with an availability period agreed upon mutually, to be drawn down by the borrower Lump-sum payments may be made conditional and limited to special requirements such as medical exigencies, home improvement, maintenance, upgradation, renovation, extension of residential property etc. It is important that nature of payments be decided in advance as part of the RML covenants. PLI at their discretion may consider providing for options to the borrower to change.
Periodic payments (monthly, quarterly, half-yearly, annual). Lump-sumpayments. Committed Line of Credit: The eligible amount of loan will be sanctioned by the lender to the borrower, to be drawn and utilized by the borrower as and when required, under mutually agreeable terms & conditions.
The borrower pays interest only as and when applicable and to the extent of the loan amount drawn. Maximum15 years. The interest rate (including the periodic rest) to be charged on the RML to be extended to the borrower(s) may be fixed by PLI in the usual manner based on risk perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms and conditions in a transparentmanner, upfront to the borrower. The RML shall be secured by way of mortgage of residential property, in a suitable form, in favour of PLI.
Commercial propertywill not be eligible for RML. The residential property should comply with the local residential land-use and building bye laws stipulated by local authorities, with duly approved lay-out and building plans. The PLI shall determine the Market Value of the residential property through their external approved valuer(s). In-house professional valuersmay also be used subject to adequate disclosure of themethodology.
The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLI, which in any case shall be at least once every five years. The methodology of the revaluation process and the frequency/schedule of such revaluations shall be clearly specified to the borrowers upfront. PLIs are advised not to reckon expected future increase in property value in determining the amount of RML. Should the PLIs do so in their best commercial judgement, they may do so under a well defined Policy approved by their Board and based on professional advice regarding property prices. The PLI will pay all loan proceeds directly to the borrower, except in cases pertaining to retirement of existing debt, payments to contractor(s) for the repairs of borrower's property, or payment of property taxes or hazard insurance premiums from the borrower's account set aside for the purpose.
The loan will be extended as regular monthly, quarterly, half-yearly or annual periodic cash advances or as a line of credit to be drawn down in time of need or in lumpsum. The PLI will have the discretion to decide the mode of payment of the loan including fixation of loan tenor, depending on the state andmarket value of the property, age of the borrower and other factors. The rationale behind the decision of mode of payment and fixation of the loan tenor shall be clearly disclosed to the borrowers. 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. Typically, a "permanent move" may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. PLIs may obtain such documentary evidence asmay be deemed appropriate for the purpose. Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Periodicity: 4. Settlement of Loan Residential Property.
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. A reasonable amount of time, say up to 2monthsmay 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. 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. The PLIs shall ensure that all reverse mortgage loan products carry a clear and transparent no negative equity' or non-recourse' guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have beenmet. The PLIs shall enter into a detailed loan agreement setting out therein the salient features of the loan mortgage security and other terms and conditions, including disbursement and repayment of the loan, in addition to the usual provisions, which are ordinarily incorporated in amortgage loan document.
The loan agreementmay also include a provision that the borrower shall not make any testamentary disposition of the property to be mortgaged and even if it does so, it would be subject to themortgage created in favour of the lending institution. In such a case, the borrower shall make a testamentary disposition of the mortgaged property in favour of any of his/her relatives, subject to the discharge of themortgage debt by such legatee and a statement that the heirs shall not be entitled to challenge the validity of the mortgage as also the right of the mortgagee to enforce the mortgage in the event of death of the borrower unless the legal representative is willing to undertake the responsibility for discharging in full the amount of loan and accrued interest thereof. In addition, the PLI may also consider obtaining a RegisteredWill fromthe borrower stating, inter-alia, that he/she has availed of RML from the PLI on security by way of mortgage of the residential property in favour of the PLI,meaning thereby that in the event of death of the borrower (and co-borrower, if any), the mortgagee is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s).
The PLIs may consider taking an undertaking from the prospective borrower that the Registered Will given to the PLI is the last Will , prepared by him/her at the time of availment of RML facility as per which the property will vest in his/her spouse name after his/her demise. The borrower will also undertake not to make any other Will' during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the PLI's favour by way of creation of mortgage on the immoveable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower's death.
The PLI will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities. The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges and statutory payments. The PLIs will ensure that borrower(s) aremaintaining the residential property in good and saleable condition. The PLI may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures. The PLI reserves the right to inspect the residential property/premises or arrange to have the residential property/premises inspected by its representatives any time before the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of such inspections. The PLI shall obtain legal opinion for ensuring clarity on the title of the residential property. The PLI shall also endeavour to obtain indemnity on title related risks, as and when such indemnity products are available in India .
The loan shall be liable for foreclosure due to occurrence of the following events of default. If the borrower has not stayed in the property for a continuous period of one year If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest. If borrower(s) declare himself/herself/themselves bankrupt. If the residential property so mortgaged to the PLI is donated or abandoned by the borrower(s). If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house; adding a new owner to the house's title; changing the house's zoning classification; or creating further encumbrance on the property either by way taking out new debt against the residential property or alienating the interest by way of a gift or will. Due to perpetration of fraud ormisrepresentation by the borrower(s). If the government under statutory provisions, seeks to acquiring the residential property for public use. If the government condemns the residential property (for example, for health or safety reasons). The PLI shall have the option to revise the periodic/lump- sum amount at such frequency or intervals based on revaluation of property, which in any case shall be at least once every five years. Borrower shall be providedwith an option to accept such revised terms and conditions for furtherance of the loan. If the Borrower does not accept the revised terms, no further payments will be effected by the Lender. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The accumulated principal and interest shall become due and payable asmentioned in clauses (13) and (17). The PLIs will observe and maintain high standards of conduct in dealing with the Senior Citizens and their families and treat themwith special care. The PLIs shall clearly and accurately disclose the terms of the RMLwithout any ambiguity. The PLIs should clearly explain to the prospective borrowers the terms and conditions of RML, the methodology followed for valuation of the residential property, the method of determination of eligible quantum of loan, the frequency of revaluation and reviewof terms and all related aspects of the RML. The PLIs may suggest to the Senior Citizens to nominate their personal representatives' usually a close relative who the PLI can contact in the event of any potentialities. The PLIs may counsel the prospective borrowers about the possible impacts to the borrowers due to adverse movements in interest rates and property price fluctuations The PLIs shall clearly specify all the costs to the Borrower(s) that are associatedwith the transaction. The PLIs shall in no way assert or imply to the borrower(s) that the borrower(s) is/are obligated to purchase any other product or service offered by the PLI or any other associated institution in order to obtain a reversemortgage loan. Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reversemortgage transaction. Overall, the PLIs shall treat the Senior Citizen borrower fairly. Initially, the response of the scheme was not encouraging and people started loosing interest because the expected borrowers desired to be assured during income-tax liability concerning the scheme and they waited for the CBDT s clarification regarding the same. Amendments to the IT Act relating to reverse mortgage came in the Finance Act 2008.The changes made in the IT Act are clarificatory in nature and provide that:
(i) reversemortgagewould not amount to transfer .
ii) the amounts received consequent to reverse mortgage would not constitute income in the hands of the mortgagor.