Mrs and Mr Sharma are now in their seventies. Both are retired government officers. They spent most of their life’s earnings for educating their three children. The eldest one became an engineer and currently settled in US with his wife. The daughter who is a lecturer got married to a Doctor. Youngest one is a Dentist married to his batchmate in Dental College. Sharma and his wife stay in their three-bedroom apartment acquired by them a few years before their retirement using bank loans and savings in the Provident Fund, Insurance Fund etc. At present, both of them struggle as their pensions are not enough to meet the household expenses and medical treatment costs. The apartment they own is in the heart of the city and has a market value of more than 1.4 cr. (About two hundred thousand US dollars). None of his children send them any money nor do they take care of them. They have an eye not on the parents but on the share in their property. However, they don’t even lend a helping hand for maintaining the apartment.
In the above case, the couple is lucky to have some monthly income in the form of pension for the services rendered in the government for many decades. But, there are many old parents from the middle and lower class families who are at the mercy of their children for their maintenance. In both cases, parents live in pathetic and humiliated conditions finding it difficult to lead a decent life.
These parents are forced to reduce their household expenses by limiting their wants and go for cheaper, low quality medical services. The financial strains and lack of support from children would adversely affect their physical and mental health and social well-being. They live in a house which has huge market value, without gaining anything from it.
Why should they live in such humiliating conditions?
There is an excellent option for them to celebrate their old age with best of facilities, health care, nutritional food, and life style. That is the Reverse Mortgage Scheme which is in operation in many countries like United States, Australia, Canada etc. Consumer Financial Protection Bureau in United States had submitted a comprehensive evaluation report of the scheme to US Congress in June 2012, wherein they found that the reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades.
Let me summarize the provisions as applicable in India issued by the Reserve Bank.
- A homeowner who is above 60 years of age is eligible for reverse mortgage loan. It allows him to turn the equity in his home (which is a self-acquired property and clear from all encumbrances) into one lump sum or periodic payments mutually agreed by the borrower and the banker. He need not repay any amount during his lifetime.
- The loan granted is based on several factors: borrower’s age, value of the property, current interest rates and the specific plan chosen. The higher the age, higher the value of the home, the more money is available.
- Married couples will be eligible as joint borrowers for financial assistance, provided at least one of them being above 60 years of age.
- The banks have the option to revise the periodic / lump sum amount at such frequency or intervals based on revaluation of property periodically.
- The loan would become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out.
- On death of the home owner, the legal heirs have the choice of keeping or selling the house. If they decide to sell the house, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs.
- As per the scheme formulated by National Housing Bank (NHB), the maximum period of the loan is 15 years. The residual life of the property should be at least 20 years. Where the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy.
- From FY 2008-09, the lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.
Very few takers!
Since the launching of the scheme (about 5 years back), very few persons have availed of this scheme. No bank has adequately marketed this scheme among the senior citizens. Very few are aware of the benefits of this scheme that help them to lead a decent lifestyle. There is a need to make the procedures much simpler by going to their doorsteps, instead of them coming to the bank and waiting for long hours.
By availing this scheme, parents can settle the liabilities and live in peace. Taking a major portion of the funds upfront as lump sum would not be a good idea. This would result in not having enough funds when there is an emergency.
Moral of the story
Through the Reverse Mortgage Scheme, parents can teach a good lesson to those greedy children who have an eye on the parent’s property and yet fail to support them financially.
(With inputs from friends at RBI, Punjab National Bank and Axis Bank)
© Sibichen K Mathew