Reverse Mortgage has been an excellent tool for retirement years in countries like US. Elderly citizens are able to receive regular cash flows from mortgaging their property while continued residing in it. This continues for lifetime of couple which helps them in meeting their post retirement expenses comfortably.
In India reverse mortgage was introduced in 2007-2008. However, very few people have considered it for their retirement years. One of the primary reasons is the absence of life long income options and the sentiments attached to own house. Also the fixed term payout option for 15-20 years offered a very low annuity in comparison to the increase in expenses every year.
To bridge this gap, Central Bank of India in association with Star Union Di Chi Life insurance came out with a reverse mortgage scheme with annuity option till death of the borrower. The annuity rates offered under the scheme look very promising when compared to the other existing RML schemes.
Let’s review the product in detail:
What Is Reverse Mortgage
A Reverse Mortgage is a scheme where any individual who has a self-occupied house and looking for regular income can mortgage it to a financial institution. In return, the institution pays a fixed periodic (monthly) installment or a lump-sum amount at a defined rate of interest. The payout is generally for a fixed term of 15- 20 years after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be.
Cent Swabhiman Plus Scheme
This is the reverse mortgage scheme from Central bank of India in tie up with Star Union Di Chi Life Insurance Company. A senior citizen above the age of 60 years, individually or with spouse of 55 years (minimum age) can avail the loan against mortgage of self- occupied own house. The bank will give loan up to a specified value of house, depending upon the age of borrower.
Features of Scheme
Some features of this product are fairly attractive when compared to other products:
- About Scheme: Cent Swabhiman is a group annuity scheme where Central Bank is the master policyholder. The borrower buys the scheme from the bank at rates offered by Star Union Dai Ichi Life Insurance.
- Annuity: This is the uniqueness of the product. Through Star Union Di Chi Life insurance, the bank is offering life time annuity to both husband and spouse. There are two options to receive annuity- with premium return or without premium return. Like other annuity products, the annuity amount varies in both the options.
- Continuation of Annuity: The annuity continues even after premature repayment of loan. This option gives a security of life long annuity to the borrower.
- Partial Withdrawal: Like in annuity plans, the borrower can avail a loan for lump sum amount up to 25% along with annuity.
- Interest Rates: As per rates illustrated on website, the bank is giving loan at rate of 12.25% with base rate of 10.75%. There is a processing fee of .15% of loan amount with maximum limit of Rs 10000.
- How Annuity is paid: The annuity payment is done by the company through the bank directly into borrowers account on the chosen periodic intervals.
- Excess Returns: As per the company data, 80% of the excess returns over 6% during a financial year will be distributed in cash to the borrowers in month of July which is an interesting feature of the product.
Expected Annuity
As per data illustrated by the bank and annuity table of insurance company, if a 60 year old goes for a reverse mortgage loan of Rs 36 lakh (Property of Rs 60 lakh valued at 60%) he/she will receive annuity of Rs 23337 p.m. or Rs 17277 p.m. based on option chosen. This amount is pre-tax and do not include processing charge.
Given below are annuities which a borrower will receive. The amounts illustrated are based on the current annuity rates offered by Star Union Da Ichi RML annuity product:
Age (Yrs) | Property Value (Rs lakh) | LTV (%) | Loan Amount (Rs Lakh) | RML Annuity Scheme For lifetime (Rs per month)* | RML Scheme for term of 20 years (Rs p.m.)** | |
Option 1 | Option 2 | |||||
60 | 60 | 60 | 36 | 23337 | 17277 | 4500 |
65 | 60 | 60 | 36 | 25719 | 17307 | 4500 |
70 | 60 | 60 | 36 | 29226 | 17346 | 4500 |
75 | 60 | 70 | 42 | 39662 | 20300 | 5250 |
80 | 60 | 75 | 45 | 50291 | 21828 | 5625 |
*The figures are pre-tax
** For comparison RML scheme of PNB is considered
If you compare with the existing fixed tenure RML schemes the payout is far lower than what Central Bank Annuity scheme is offering. Even if borrower has to pay tax at highest rate annuity scheme payout is much higher than a fixed tenure scheme.
Positives
Although the property is revalued every fourth year to check the annuity rates, the annuity payout will still happen even if the house value drops. This is highly positives for senior citizens as there is certainty of regular income during adverse scenarios. The other benefit is that the borrowers don’t have to repay the loan (since it an annuity product) and there is no liability on legal heirs in case value of house drops at the time of selling the property. Also, to counter inflation the company have an option of annuity increase at simple rate of 5% which can be considered but the amount will be lower than other two options.
Not Favorable
The only drawback in this product is that the annuity is taxable but payout still surpasses the fixed tenure schemes. Since Annuity is more and lifelong, the loan repayment amount is much higher than a fixed term RML schemes. When borrower or legal heirs want to release the house the higher payout may be a deterrent for some families.
Should you consider?
One of the big drawbacks in RML products was the fixed term payout which senior citizen didn’t find interesting. The basic reason was the requirement of money at higher age is more which the product was not offering during that period. The product from Central Bank of India has surely addressed this issue by offering life-long annuity and is a considerable product, especially when you do not have any other options to meet your golden year’s needs.
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