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A nice shelter for the aged
July, 29th 2006


Reverse mortgage is an idea whose time has come

Old people with no one to support them can convert their houses into milch cows.

The National Housing Bank (NHB), it is reported, has given its approval in principle to the idea of reverse mortgage. Predictably, the idea took shape first in the US, the land of innovations. Parenthetically, one is apt to wonder why it did not take shape in Japan, a country that boasts the largest senior citizen population given the fact that the entire concept is senior citizen centric.

The concept operates quite simply. Old people with no one to support can convert their houses into milch cows. They have plenty of options take a one-time payment, take series of monthly receipts or settle for a line of credit. But the common thread running through all the options is they are non-recourse loans. The senior citizen will not be bothered with demands for repayment during his lifetime, with the mortgage company at liberty to sell the house on the death of the senior citizen to pay itself off.

And for good measure, the receipts are all tax-free in almost all the states in the US. Instead of shifting to old-age homes, senior citizens deserted by their children or otherwise lonely and forlorn can continue to live in the comfort of their homes, which they would have converted into the hen that lays golden eggs by entering into a reverse mortgage arrangement.

Postponement of repayment

The mortgage company, of course, would charge interest and in all likelihood the clock would start ticking with each instalment of handout, but the collection would be postponed to the point of death of the senior citizen. In a way this would be a poetic justice to children who covet parental property but shy away from their responsibilities they would have to liquidate the loan with interest before asserting their rights as heirs.

One wonders what the tax authorities in India would do with such arrangements. Will they tax the periodic handouts as annuity? The NHB would, of course, lobby for tax exemption at least in respect of one house of one's choice. It is reported that the NHB has in mind annuity payments for 15 years. There is no reason why it should not continue till the lifetime of the senior citizen. No one knows exactly why the scheme is called reverse mortgage. After all, it has all the trappings of a mortgage with the only difference being postponement of repayment into future with a generous moratorium period in between which, of course, can shrink should the beneficiary of the loan die sooner than later.

Anyway, the policymakers who have been sympathetic to other form of reverses so to speak reverse merger and reverse repo should be equally sympathetic to reverse mortgage too. We owe this to our senior citizens. Mr Warren Buffet denied free lunch coupons to his children by donating as much as 85 per cent of his wealth to charity. Our senior citizens can dangle the threat of reverse mortgage to their children should they go astray or should they, better still, go through with such an arrangement anyway. If Mr Warren Buffet was driven by altruism, lesser mortals entering into reverse mortgage arrangements would be driven by a less lofty but nonetheless an understandable motive survival.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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