The
other day, my friend and I went to another friends house who was bedridden and
in great pain. We are all Senior Citizens 65+. In our working life we
have acquitted ourselves respectably and retired with grace. Our friend was diagnosed as a case of
spondylitis, diabetes and cardio vascular problems. He was a junior officer in a public Sector Undertaking of Government of India. He has exhausted almost all his funds in
moving around the country on transfers, changing jobs, raising his siblings,
giving them good education, and marrying them off in good and respectable
families. His one son is in America, a
software engineer and another in UK, a doctor.
He and his wife live alone in Bangalore.
Both of them have one or the other medical problems. His only assets are a flat in which he lives
and some amount he gets which has been dwindling. He cannot afford costly treatment and also
beyond medical insurance. His pride
stands in the way of his asking for any money from his children. Even if he suppresses his pride it is
doubtful whether he will get any money from his children. Not an odd story. We can find many such cases around us,
similar or worse. However, the flat
which he has is in a good locality, somewhat up market and has a decent market
price. The value has been appreciating. But that will not help him, not in India.
A
second example. An educated entrepreneur
of the yester-years. Rags to riches
story. He had built a medium size
enterprise in eighties. Built a decent
house in a upper class suburb. No
children. He has closed down the
business due to advancing age and medical problems. Last few years of running has also seen some
loss. He has to live on his
savings. During the heydays of the
business he had lived in some what luxurious way.
There
is another story where both the son and daughter are abroad. The individual has been advised by pass. That would cost him at least Rupees two
lakhs. He is worried about raising it. Both the children have told that they are not
interested in the ancestral house in India as they and their children do not
have the slightest intention of coming back to India. They have told their families he can do
whatever he wants with the house he lives in.
Today in
our country such nuclear middle class families of senior citizens are growing
in numbers. In all the above cases the
couples have apartments / houses which have good market value but as they have
to live there they are locked up stocks in India. The percentage of population above 60 is
growing. All these citizens have good
chances of living for another 3 decades.
However it cannot be said that they will lead a healthy, active and
cheerful life.
Some
time ago ICICI Prudential Life Insurance released an advertisement under retirement solutions which highlighted the
problem of old age succinctly It read as under
Age
35 --- visits to the doctor
2times
Age
55 --- visits to the doctor
15times
Age
70 --- visits to the doctor 22
times
It also
signed off with a statement “Retire from work, not life.”
Although
medical science has advanced in leaps and bounds in the recent times cost of
treatment has gone up because of the heavy investment in machinery andequipment the hospitals have to make. We
the senior citizens who were working class of the socialistic era had no other insurance but
Government administered Life Insurance and as far as I know there were no
retirement solutions of the type offered by the advertisement.
In many
other countries of the West a solution has been devised to meet situations
stated above. A senior citizen can
borrow from the bank on monthly basis and yet live in the house until death or
coming in to better circumstances. The
financial instrument that helps him is REVERSE MORTGAGE.
Reverse
mortgage allows the home owner to continue living in the home without being required to repay the
loan. In exchange, the lender receives
a substantial fraction of the home’s equity. The proceeds of the loan are
tax-free, there are no minimum income requirements, and for most reverse
mortgages, the money can be used for any purpose. Government and the insurance
fraternity together have made it simple and user friendly in procedure. The mortgagee takes over the house on the
death of mortgager, disposes of the house and recovers the amount and
interest.. And balance is given to
inheritors.
Lenders
when granting reverse mortgages do generally not consider income of the person,
and no medical tests or medical histories
are required. The amount you can borrow depends on your
age, the equity in your home, the value of your home, and the interest
rate. Reverse mortgages administered by
the government may have other requirements as well.
In
the United States, you can be paid in a lump sum, in monthly advances through a
line of credit, or a combination of all three.
The loan advances which are not taxable, generally do not affect Social
Security or Medicare benefits. However,
you should keep in mind that reverse mortgage tend to be more costly than
traditional loan.
Whether
seeking money to pay for medical treatment, finance a home improvement, buy
long term care insurance, or supplement their income, many older Americans are
turning to “reverse mortgages.” The
underlying principle is that the scheme allows older consumers to convert the
equity in their homes to cash while retaining ownership of their property.
With
a “regular” mortgage, one makes monthly payments to the lender. But with a reverse mortgage, one receives
money from the lender and generally does not have to repay it for as long as one lives in own
home. In return, the lender holds some –
if not most or all – of one’s home’s equity.
Depending
on the plan, reverse mortgages generally allow home owners to retain title to
their homes until they permanently move, sell their home, die or reach the end
of pre-selected loan term. Generally, a
move is considered permanent when the homeowner has not lived in the home for
12 consecutive months, So, for example a
person could live in a nursing home or other medical facility for up to 12
months before the reverse mortgage would be due.
Introduced
in the late 1980s, reverse mortgage has helped many senior citizens among home
owners who are “house-rich-but-cash-poor” remain in their homes and still meet their financial
obligations. The proceeds of the loan
are tax-free, there are no minimum
income requirements and for most reverse mortgages, the money can be used for any purpose.
In
USA, about which I have some information
there are 3 sources of reverse mortgages, viz,
- The federally insured Home
Equity Conversion Mortgage (HECM), administered by the Department of
Housing and urban Development (HUD).
- Single-purpose reverse
mortgages, usually offered by state or local government agencies for a specific reason.
- Proprietary reverse mortgages,
offered by banks, mortgage companies, and other private lenders and backed
by the companies that develop them.
- We
shall not go into the details as the purpose of this article is to make aware
the readers the availability of the
scheme in other countries.
If
you seek as HECM, you also must undergo
free mortgage counseling from an independent government-approved “housing
agency.” Financial institutions offering
proprietary reverse mortgages may require similar counseling or home owner
education.
Some of the
disadvantages of the reverse mortgage schemes are as follows.
- Reverse mortgages tend to be
more costly than traditional loans because they are rising-debt
loans. The interest is added to the
principal loan balance each month.
So, the total amount of interest owed increases significantly with
time as the interest compounds.
- Reverse mortgages use up all or
some of the equity in a home. That
leaves fewer assets for the homeowner and his or her heirs.
- Lenders generally charge
origination fees and closing costs, some charge servicing fees. How much is up to the lender.
- Interest on reverse mortgages
is not deductible on income tax returns until the loan is paid off in part
or whole.
- Because homeowners retain title to their home, they remain
responsible for taxes, insurance, fuel, maintenance, and other housing
expenses.
- Payment terms, including
acceleration clauses. They state
when the lender can declare the entire loan due immediately.
- Some reverse mortgages, the
lender may take a share of equity appreciation. This could create issues for the
homeowner or heirs, particularly if the value of the home rises
unexpectedly during the loan.
- There are some unscrupulous
elements among lenders.
If
you are considering a reverse mortgage, it is important to understand how the
loans work and what your rights and responsibilities are.
Under
the “Federal Truth in Lending Act”, lenders must disclose these terms and other
information before your sign the loan.
On plans with adjustable rates, they must provide specific information
about the variable rate feature. On
plans with credit lines, they must inform the applicant about appraisal or
credit report charges. Attorney’s fees, or other costs associated with opening
and using the account. Be sure you
understand these terms and costs.
You
generally have at least three business days after signing a reverse mortgage
contract to cancel it. The cancellation
must be in writing.
If you
suspect that a lender is violating the law, you can register your concerns with
the lender or loan servicer. You also may
wish to file a complaint with:
Ø your state Attorney General’s office
or state banking regulatory agency
Ø the Federal Trade Commission
(FTC). File a complaint online at www.ftc.gov
I
have asked some of my banker friends about the possibility of introducing such
a facility in India also. In India,
after independence, because of spread of education and communication, the
middle class population which was small in pre-independence era has been
growing. Most of us, new middle class,
have acquired property with our own earning, that too in cities to which we
migrated in search of employment. Most of us gave best of the education we
could afford to our children taking it as an bounden duty of the parents. Our children have migrated to better pastures
abroad in search of better opportunities
and standard of living. Many a times we
have encouraged them to do so. Now we
live alone supporting ourselves of meager savings and a house to live in. I personally feel there is an opportunity for
banks to step in. Will the reverse
mortgage be a profitable proposition. My
friends abroad in UK and USA say that they know of at least half a dozen
private Financial Institutions there who offer reverse mortgage. Many of the bankers at middle level did not
know existence of such a scheme. At
higher level some knew its availability in advanced countries. They gave a host of reasons why it cannot be
introduced in India, not at the moment.
Most frequently mentioned reasons are
·
The inheritance laws of the country
·
Non availability of funds
·
Burdened
with too many loan schemes with social objectives thrust (?) upon
Them by Government due political
expediency. The laws of the country and the
lengthy process of recovering the possession of the house once the owner
passes away.
Indian
Bank community is united in risk aversion and avoidance of innovation. Twenty years ago they did not see any point
in entering housing finance or lending on white goods. I saw first ATM Delhi installed by City Bank
an American Financial Institution. It took almost a decade for other banks to
follow a few Government banks have taken the first step in this direction this
year only. They re used to looking up to
Government for directions. So one can
only hope that Government will look into this scheme and its
relevance to India. If required the laws
could be suitably amended. Laws should
not be stumbling blocks to progress
towards extending greater security, I mean the financial security, to the
citizens especially to senior citizens.
