Insurance companies by virtue of their long-term horizon and nature of business are perfect partners for banks offering a reverse mortgage product.
Banks, which typically operate with funds of between one and five years maturity, are unwilling to take a call on how interest rates will move in the long term. Now, the stage is set for tripartite agreements that will give a fillip to this new product.
Take a look at this example:
Mr and Mrs Raj Kumar aged 67-years and 63-years, respectively, own a property worth Rs 1 crore (valued by the bank and not based on market value). The bank would pay 65 per cent of the value.
The bulk amount of Rs 65 lakh is credited to the insurance company which will pay a fixed annuity ( around Rs 30,200 a month) till the last surviving spouse.
There is an option where 25 per cent of the Rs 65 lakh (subject to a maximum of Rs 15 lakh) can be withdrawn by the couple for health reasons or for other contingency purposes. The monthly annuity in this case will proportionately stand reduced.
Star Union Dai-ichi is the currently the only insurance company to offer an annuity product on reverse mortgage.
The scheme is available as ‘CENT Swabhiman Plus' offered by Central Bank of India and ‘Union Reverse Mortgage' by Union Bank of India. In both these schemes the annuity is paid till both the spouses are alive irrespective for how long they live.
The expertise of an insurance company in mortality rates and long term fund management help pay a fixed annuity till they are alive.
The options
There is an option (option 1) available in which there is no return of the purchase price. For instance, 67-year-old Mr Sitharaman, whose wife Janaki passed away three years ago and their only son settled in the US, opted for ‘non return of purchase price' option.
Assuming the loan amount/purchase price as Rs 65 lakh (for easier comparison), he would get higher monthly annuity ( around Rs 44,600 a month). After his demise, the account will be closed with the bank taking over his Besant Nagar property in Chennai, though the option will be still available to the legal heirs to pay off the loan and take the property back if they wish.
On the other hand, if he wanted to leave the option (options 2) to his legal heirs to redeem the property, he may opt for the option ‘return of purchase price' where the annuity will be lower but the burden on the legal heirs for repayment of the loan will also be lower.
For example, Mr Dhabolkar and wife Sharminda, aged 67 years and 62 years respectively, who live in Borivali in Mumbai, have gone in for the second alternative ‘return of purchase price'.
If Mr Dhabolkar were to die before his wife and he wanted to secure that she gets the annuity payments till she lives, here the annuity payments would be lesser compared to the first option (option 1).
It is to be noted that the option to redeem the property and also to prepay the loan account is always available to the legal heirs or nominees in both the options and only if the legal heirs are unwilling in redeeming the property, the bank will sell the property and close the loan account. The legal heirs will not be liable for the shortfall in the loan account, if any.
There are also options for increasing the annuity amount every year (by 5 per cent) to compensate for increased costs of living.