Chennai:

A self-occupied home in a prime locality is actually worthless for the elderly without adequate means of support, in the absence of old age security. Consequently, India has many Sadasivams who are forced to encash their properties for their monthly sustenance.

They would have happily opted for a reverse mortgage plan on of their homes if only the domestic housing finance companies and other financial institutions had offered the facility.

As the name suggests, a reverse mortgage is the exact opposite of a normal mortgage transaction (hence the name reverse mortgage) but restricted to a housing property. A normal mortgage transaction involves the home being pledged by the buyer to the lender as a security for the loan. In a normal mortgage transaction, banks and home finance companies have to consider the borrower's income and repayment capacity to determine the loan amount, duration and the monthly repayment.

However, in a reverse mortgage (popular in the US and Canada) the lender instead of paying upfront, pays the borrower a sum every month.

A person who is over 62 years of age and owning a housing property will be eligible to enter into a reverse mortgage transaction even when he owes money on a first or second mortgage.

The money received from reverse mortgage could be used to pay off the previous mortgages, monthly livelihood, medical bills, repairs, and extensions of the original property and even for pleasure like travel.

So how does the borrower repay the loan? Interestingly, borrowers do not make any repayments under a reverse mortgage. The loan is settled only on the death of the borrower and his spouse or when they cease to occupy the home as their principal residence.

The borrower's children or legal heirs have the option to pay off the debt and retain the property or alternatively let the lender sell it off to recover the loan amount. Lenders are entitled to retain only the amount loaned by them and any surplus over and above the original loan amount belongs the borrower's children or legal heirs since the amount owed on a reverse mortgage can never exceed the value of the home at the time the loan is extinguished.

The eligibility for the amount of a loan and the type of reverse mortgage depends on the property owner's age, the property's market value, location, previous charges and the current interest rates. The older the property owner is, the more valuable the home becomes.

The loan amount is tax-free and there is also no capital gains tax, as the home is not sold to the borrower, but merely mortgaged. Additional loans can be taken when the home property value appreciates. Significantly, the lender has to pay for it even if the property value depreciates at the time of its disposal.

The mortgage money could be disbursed in any of the following means: (a) a lump sum upfront (b) fixed monthly instalment (up to life), (c) a line of credit and (d) a combination of all three.

Apart from this basic difference, in a traditional loan scheme, reverse mortgage transaction also involve costs like origination fee, appraisal fee, insurance and other charges subject to certain limits. The costs are part of loan transaction and the borrower does not have to pay anything for it except the property valuation survey fee.

For a lender, a reverse mortgage is a viable proposition in a low interest regime. The lending institution can in turn sell / securitise its reverse mortgage portfolio to another agency or refinance company.

A property owner can use a reverse mortgage as a source finance to raise a sizeable corpus to buy a new property, since he has the option to get the loan amount in one lump sum.

Why have India financiers stayed away from launching this product? Compared to normal housing loans, the interest rate on reverse mortgages is higher. According to Nitin Palany, managing director, Sundaram Home Finance Limited, "Today, the vanilla housing finance product market is booming. As a result there is no need for companies to innovate new home finance products." The housing finance market is growing at 30 per cent per annum.

According to Palany, various legal issues could crop up. "In the case of a simple housing loan product we now have the Securitisation Act to take care of defaults. In case of reverse mortgage, the legal heirs may not agree to dispose off the property though they may be unwilling to settle the debt with lenders or may not have the funds to do so."