Reverse Mortgage Loan Scheme – Reverse mortgage loans (RMLs) were introduced in 2011 to provide financial security to senior citizens in their post-retirement life. It offered several advantages such as principal based on the value of the property instead of the borrower’s credit history, recurring loan proceeds that are not taxed in the hands of the borrower, etc.
However, he could not achieve the success in India that he experienced in the West. The RML contained several structural inconsistencies regarding the duration of the loan and the amount of periodic repayments that made it ineffective in comprehensively addressing the needs of aging senior citizens. It could not answer questions such as – What happens if the borrower outlives the term of the loan? In the absence of alternative accommodation, where would the borrower live if the bank were to sell the primary residence to repay the loan? To address these issues, National Housing Bank has introduced Reverse Mortgage Enabled Annuity Scheme (RMLeA) in collaboration with Star Union Daichi Life Insurance Company Ltd., (SUD Life) and Central Bank of India (CBI). A Reverse Mortgage Enabled Annuity (RMLeA) provides higher annuity payments for the life of the annuitant to ensure that he lives with dignity after retirement.
Reverse Mortgage Loan Scheme
It is a tripartite agreement between the lending bank, the life insurance company and the borrower. Initially, the borrower mortgages his house with the bank. The bank then determines the principal amount of the reverse mortgage based on the market value of the property. The loan-to-value ratio in this case is 55%. The bank will redeem the current annuity plan by paying the loan principal/purchase price to the life insurance company in favor of the borrower. At the beginning of the annuity plan, the bank will be known as the lead underwriter and the borrower will be called the annuitant. Under the annuity plan, the insurance company will prepare the entire payment plan based on its sophisticated pricing models and determine the annuity payments to the borrower in periodic installments. The principal insured can choose the type of annuity and the method of annuity payment (monthly, quarterly, semi-annually or annually) based on the preferences set by the borrower. Every year, 15 days before the policy anniversary, the bank must submit to the insurer a certificate of the existence of the annuitant to ensure the continued payment of the annuity. The annuity payment would cease either on the death of the annuitant or on the surrender/sale of the house property by the annuitant.
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The term of the loan in case of RML is limited and the borrower can use the loan for a maximum of 20 years. The primary objective of a retiree, i.e. getting a fixed income for life, is not fulfilled in case of RML if the borrower outlives the term of the loan. Again, after the loan expires he would have to think about another source of regular income.
In the case of a Reverse Mortgage Enabled Annuity (RMLeA), the objective of getting a fixed income for the retiree’s life is fully met. The borrower/annuitant receives the annuity payment as long as he is alive and the annuity payment would cease on his death.
The cost of living after retirement has increased significantly due to inflation and rising health care costs. Consequently, the pension benefits of senior citizens are very inadequate to cover those costs. In such a scenario, RML initially gave hope as an income supplement. Subsequently, it was found that the periodic payments received under the RML were very inadequate compared to the rosy picture that was painted at the time of purchasing the product. On the contrary, the annuity payments under RMLeA are higher than the periodic payments received under RML.
There are several reasons for this significant gap in periodic payments. First, under RML, the installment amount is calculated by the bank using conservative credit mandates, but the insurer under Reverse Mortgage Enabled Annuity (RMLeA) uses a sophisticated pricing model to arrive at the annuity payments. Second, when the underwriter receives the purchase price from the bank on the Reverse Mortgage Annuity (RMLeA), it further invests the purchase price, and if the return on investment is greater than 6%, then proceeds up to 80% further back to the annuitant as a bonus.
A Government Reverse Mortgage: The Pension Loan Scheme Explained
In Reverse Mortgage Enabled Annuity (RMLeA), the life insurer offers three types of annuity options namely:
In options 2 and 3, the insurer has to return the purchase price to the bank to settle the loan principal, and in option 1, the insurer does not return the loan principal to the bank. You will get higher annuity payment amount in case of option 1.
In case of Reverse Mortgage Enabled Annuity (RMLeA), the loan amount varies depending on the age of the borrower ie. 70% (70-80 years), 75% (80 years and above) etc., while 60% of the property value in case of RML.
A reverse mortgage-backed annuity (RMLeA) offers an advantage over purchasing an annuity plan directly from a life insurance company as part of your retirement. An annuity received under a regular pension plan is taxable in the hands of the annuitant. RMLeA is a tax efficient option as here the annuity payments are tax free in the hands of the annuitant.
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In the case of RML, the bank returned only the principal amount which it paid in periodic installments to the borrower. But in RMLeA, the bank returns the entire principal given to the insurer for making the annuity plan, irrespective of how much amount is disbursed by way of loan to the borrower.
Furthermore, RML used the funds of the house to recover both the principal and the accrued interest amount. But in the case of RMLeA, the house property is only used to realize the accrued interest, while the principal of the bank remains intact with the insurer which would be returned at the time of the borrower’s death.
If you are looking for a regular stream of income to supplement your disposable income after retirement, then a reverse mortgage with an annuity option may be beneficial. The product may look attractive, but you have to be careful. You must work closely with the lender’s bank to understand the amount and method of annuity payment. You should also know the complex procedure that the bank will use to repay the loan principal and accrued interest. Before taking the final step, you can discuss this with your legal heirs as the mortgage will put their assets at risk.
Kishore Kumar Balpally, believes that financial literacy and discipline are the keys to one’s financial freedom. KishorKumar is a certified financial planner, personal finance blogger and founder of an award-winning wealth management platform. simplifies investing for individuals and improves business growth for registered investment advisors using artificial intelligence and machine learning. AI machines plus the intelligence of a human advisor enable comprehensive client-centric advice at a fraction of the cost of a conventional advisor.
What Is A Reverse Mortgage| Money
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Many Australians have never heard of the Pension Credit Scheme, and many others assume it’s only for pensioners, which is understandable given its name.
All About Mortgage Loan
The government is therefore set to rename it the Home Equity Access Scheme and make the interest it charges more reasonable, in Thursday’s mid-year budget update.
The soon-to-be-named scheme is best thought of as a reverse mortgage where instead of paying off the home loan each month, the homeowner borrows more from the house each month, paying back what they borrowed when the house is eventually sold.
Although reverse mortgages have been provided commercially for some time, the number of servicers has dwindled as major banks have exited the field in the face of rising regulatory and compliance costs.
The government version is wrongly called the Pension Credit Scheme (PLS), although it is available to everyone
Reverse Mortgage Or Home Equity Loan
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