For senior citizens with no dependants, the proposal of a reverse mortgage in the Budget 2007-08 was supposed to be a perfect way to earn regular income and unlock the value of their property.
However, the products had few takers due to numerous problems. One, the annuity paid by banks, though tax-free, was quite low. If the bank had a tie-up with an insurer, the annuity amount was much higher but taxable.This was because the amount paid by banks was treated as a loan whereas the insurers’ annuities were treated as income. The product was available for only 20 years.
The government has decided to make the product more attractive by removing this anomaly of taxing annuities paid by insurers. Also, the product will be for the entire life of the senior citizen, and not just 20 years. According to R V Verma, chairman and managing director, National Housing Bank (NHB), “Since the annuity payments were taxed there were no takers for it. Now, since the Central Board of Direct Taxes has announced the annuity will be exempt from tax, this option will be more useful for borrowers.
Also, the amount being paid as annuity will go up substantially, almost three times. “Annuity is a specialised product and life insurance companies have expertise in offering annuity,” adds Verma. Insurance companies are better equipped than banks when it comes to such products because they use parameters like mortality rate to decide on payments. There will be a tripartite agreement between the lender (bank or non-banking finance company), a life insurance company and the customer for the product to succeed.
While most of the leading public sector banks provide reverse mortgage, Central Bank of India is the only one that currently offers a lifelong annuity. It has a tie-up with Star Union Dai-ichi Life Insurance. With the changed rules, the reverse mortgage with annuity from insurance company scores over it.
In other words, someone with a property of Rs 1 crore can raise 60 per cent on the property. He can take part of the money, say 25 per cent, in a lump sum and the rest will be divided in annuities for his lifetime. V K Sharma, managing director and chief executive, LIC Housing Finance, says, “This move will help in making the product more attractive to customers.”
The government and National Housing Bank need to iron out some other issues. At present, the maximum loan banks can give is only 60 per cent of the property. Also, the person giving the property on reverse mortgage has to ensure it is well maintained. All these lead to doubts in the mind of the seller. They would rather sell the property and realise the entire value instead of giving it on reverse mortgage. The latest move is in the right direction.