Reverse Mortgage is the new type of loan scheme to cater to the old age people’s last days needs. But few concerns still exist in Reverse Mortgage Loan scheme like-What if property value drastically drops? What if a person live even after 20 years of taking loan? (Maximum tenure in Reverse Mortgage is 20 years). To avoid such fears and secure constant income stream from Reverse Mortgage, National Housing Bank took initiative and introduced “Reverse Mortgage Loan enabled Annuity” plan. Let us see how it actually works.
In this post I restrict myself to “Reverse Mortgage Loan enabled Annuity” instead of going back to features of “Reverse Mortgage”. First look at it’s features then we see the advantages and disadvantages of this plan.
1) In Reverse Mortgage Loan enabled Annuity your annuity is fixed throughout borrower’s life span. Which is not the case with normal Reverse Mortgage loans, suppose property value drops then your monthly payment drops. Also if borrower lives even after 20 years of loan period then you will not get any periodical income from normal reverse mortgage but this is not the case with annuity backed reverse mortgage.
2) Lenders for such annuities are Scheduled Commercial Banks and Housing Financing Companies. But annuity sourcing will be from life insurance companies. Currently Star Union Dai-ichi Life Insurance is providing this facility in collaboration with Central Bank of India.
3) Eligibility are as applicable to normal Reverse Mortgage. Few of them are-Minimum age is 60 years, borrower must be owner of the property, property must be free from any encumbrances, residual life of the property should be atleast 20 years, prospective borrower must use the property as permanent primary residence.
The amount of loan depend on market value of property, property value should not be below 5 lakhs. Maximum Loan to Value (LTV) for 60 years to 70 years age of borrower will be 60% of property, between 70 years to 80 years will be 70% and above 80 years of age will be 75%.
4) Annuity payable options-Monthly, Quarterly, Half yearly or yearly. Even you can opt for lump sum or line of credit too. But depends on terms and conditions of lender.
5) Indicative annuity price is as below.
Option I-Annuity till the demise of borrower.
Option II-Annuity till the demise of borrower and on demise with purchase price. Above rates are net of servicing charges which is maximum of 1.5% PA.
From the above table your notice that annuity is high if borrower age is older and less if borrower is nearer to 60 yrs.
6) Periodic Payment Terms-Minimum purchase price from Life Insurance will be Rs.2,00,000. Once the type of option of annuity opted then it will not be get cancelled, surrendered or terminated. If borrower are joint holder then they can inform lending bank about the % of share in such annuity. In case of joint borrower, first annuity will be paid till the demise of first borrower. After that the purchase price is used to re-purchase the annuity in the name of second borrower and the rate of interest and rules will be as on that day.
7) Borrower will be eligible for bonus from life insurance company if the bonus so declared is more than 6% . In this case 80% of the bonus so received will be distributed as cash bonus.
8) For Option I-5% of property value and for Option II-10% of property value will be kept aside as Reverse Mortgage Redemption Reserve which will be used for settlement of loan of reverse mortgage.
9) Three days of grace period is given to cancel the loan after finalizing the loan. Any amount disbursed during such period need to pay back to lending bank. But this free look in period will not be applicable once your life annuity starts from life insurance company.
10) Ongoing service charges-For Option I-1% PA of principal outstanding and 1.5% for Option II.
Loan closure, Settlement of Loan and prepayment of loan looks almost same as that of Reverse Mortgage.
Advantages are-You no need to bother about fluctuating value of your property as your annuity is fixed. No need to worry about longevity risk as period is unlimited. Borrower will receive till his last breath. Also if you compare with Reverse Mortgage payouts this annuity payouts are bit higher.
Disadvantages are-As this type of loan is called annuity so whatever the annuity you will receive under such loan scheme will be taxed as per your applicable tax slabs. Also service charges are capped as maximum 1.5% of principal. So these are the only two negative points of this scheme.