Should you opt for Reverse Mortgage or not?

India’s grey population is on a rise and as per the current estimates, India is a home to 100 million elderly people. With the intention to address the financial concerns of the elderly, the Government of India had introduced the reverse mortgage scheme in its budget for the financial year 2007-2008. Here we try to unearth some of the vital facts about the relevance of the reverse mortgage in India.

What  is the reverse mortgage scheme?

The reverse mortgage functions inversely to the regular home mortgage system. In the reverse mortgage, the property owner enjoys the privilege to continue to live in his own home until his or spouse’s lifetime, while accepting a specified amount for the specified term against the property. However, his ownership gets transferred to the bank on his or spouse’s demise, whichever is later.

Features of the reverse mortgage

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The property should have been self-acquired and should be free from encumbrances. Also, the house should be self-occupied.
• The maximum loan is up to 60 per cent of the value of the residential property.
• The maximum tenure is 20 years however few banks have capped it to 15 years also.
•  The borrower can opt for a part remittance in a lump sum which could not exceed Rs. 15 Lakh and the rest in monthly, quarterly or annual payments where monthly payments could not exceed Rs. 50000 each month.
• The bank would take over the property only after borrower’s death
• Currently, the maximum loan amount is capped to Rs. 1 Crore.

Taxation Aspect

Under section 10 (43) of the Income Tax Act, in the reverse mortgage, the money received by the owner of the property, whether in lump sum or annuity is tax exempt. However, provisions of capital gains tax will apply if the property is disposed off by the bank, the borrower or his/her legal heirs. In case, the legal heirs want to take only the repossession of the property by paying off the  outstanding dues to the bank then tax liability will not arise.

Viability of Reverse Mortgage in India

The reverse mortgage scheme has failed to cheer up the elderly crowd in India due to many factors. In the first place, the maximum cap of Rs.1 Crore on loan amount hardly appeals to the urban population due to soaring real estate prices in urban areas as well as ever increasing cost of living in these places.

Secondly, the life expectancy on an average has increased and therefore the tenure of 20 years and in many cases, 15 years, puts the borrower on risk if he outlives the annuity period. Thus, the annuity payments from the reverse mortgage appears to be insufficient particularly when the medical needs grow at this phase. Apart from this, in spite of clear guidelines from the Central Bank of India, the aging crowd shy away from this scheme due to the cumbersome legal and compliance process of the banks.

After seeing the failure of the scheme in India, the RBI is in consideration of launching a combination mortgage product of the home and reverse mortgage loan, the success which appears to be bleak.

Conclusion

The reverse mortgage can be a viable option for those who do not have legal heirs which can put them in a fix otherwise. The legal heirs might even lose the right over the property if they are unable to settle the scores with the bank. However, it is advisable to sell the property as it will fetch sufficient amount compared to that of a reverse mortgage. Also, from the sale proceeds, one can consider relocating to a smaller town or buying a less-expensive home and invest the residual amount to provide for monthly income.

Financial Planning in the right hand

Nowadays, it’s been a growing trend of getting those pesky calls from people calling themselves as “Financial Planners”, who are more concerned about your Financial Future than anybody does. These calls could reach you from your very own Bank or from any other Financial Service Provider. In fact, the whole idea of Financial Planning is now widely used across Financial Industry to pitch you with another appealing complicated product or to add more complexities into your existing complex financial situation. The reality is most of the so called Financial Planners are themselves unfamiliar with the idea of Financial Planning and the question that pops into your head is whether to believe them or not? I shall be highlighting few points to clear this utter confusion: -

1)      Why “Financial Planning” term so strongly and commonly used ?– Off lately, Financial Planning is taking its space among Indian consumers. FPSB, India (a Professional Standards setting body for Financial Planners in India) is proactively spreading the Financial Literacy among Indian consumers and working towards safeguarding there interests. Resultantly, a growing part of Indian population is realizing the importance of disciplined approach towards their finances rather than just to be an ad-hoc buyer of products. The growing awareness has actually put off their urge of buying products, which has caught attention of most of the product sellers. So now, Financial Planning is used to instill a sense of trustworthiness in their transaction with you.

2)      How to believe on authenticity of Financial Planner? – You can always ask them if they are certified holder of CFP^CM designation. Also, you can verify the details of certified planners on www.fpsbindia.org , which will ensure that you are dealing with a real planner. You will also get details of the experience at the same place which would indicate on how seasoned your planner is?

3)      Should you go ahead? – Once you find yourself satisfied with the amount of details you have of your planner, you can go ahead to engage him/her in order to take control of your financial goals. It is only after the financial planning process starts then you will know the difference created in your life.

4)      Are you on right track ?- A good way to rate the trustworthiness of a Financial Planner is that he will always be transparent in his engagement with you and will walk an extra mile to help you understand the implications of his recommendations and specify  conflict of interest, if any. Also, he/she should be regularly be reviewing the Plan and updating you on the progress that you have been making.

Most of the people ignore this very basic requirement of Financial Planning for their own reasons while lot many times just because they have burnt their fingers by entering into transactions based on misleading advice of a financial advisor. Time is changing and so is important to change your perception. There is a demanding need to focus on every aspect of your financial scenario than just following mere investing philosophies and those days are not far when hiring a real Financial Planner would soon become inevitable.

Sale of Mortgaged Home

    Tarun, aged 34 Yrs, had taken a home loan amounting to Rs. 15 Lakhs for a studio apartment. He has been paying his home EMI unfailingly for the last 6 Yrs. Now, Tarun has moved to a better job and is considering buying a bigger house as the present apartment is not sufficient to address his needs for his growing children. The outstanding amount on this apartment remains Rs. 11 Lakhs. Tarun is in doubt, if he could sell his studio apartment against which home loan is still outstanding. Then the answer is YES, Tarun could deal with this situation in these ways: -

1. When Buyer is taking loan from the same Bank as that of Seller: - When potential buyer agrees to get a loan from the same Bank from which Tarun’s loan is attached, the process could be taken off simply with minimal documents. Since, the Bank itself had verified the legitimacy of the property; buyer will also be saved from hassles of verification.
2. By Entering into Sale Agreement with Buyer : - If buyer gets a pre-approved loan then Tarun could enter into an agreement with the Buyer specifying the clause that the outstanding loan amount will be paid with the sanctioned loan amount of the Buyer. Once the loan is pre-paid, Tarun will get the original documents in his name and he could execute the sale deed with the Buyer.
3. When Buyer pays the down-payment : -Tarun could directly pre-pay the outstanding amount with the down payment he will receive. Once original documents are transferred in his name, he could proceed with the Sale deed and the outstanding amount could be paid to him from the Buyer’s sanctioned loan.
4. When Buyer pays in Lump sum: - When potential Buyer agrees to pay him lump sum, Tarun could settle his dues with the Bank and get the documents registered in his name. Buyer could take a loan, later on, once the legitimacy of the documents and property are verified by the Buyer’s Bank.

Tarun could opt to move to a bigger home by taking another home loan and paying a higher down payment. By doing this, he could restrict the tenure of his home loan to below 20 years or by decreasing the monthly installments which would be higher otherwise.

Credit Card Management

Priyanka could not contain her excitement when she finally got a Credit card, after much of the complicated verification that she had been put through. Her shiny card with a credit limit of One Lakh was enough to set her on shopping spree. On top of that, the golden word of ‘SALE’ at the Mall just added up to her excitement, to buy her things she can’t, till now.

This happiness was sweet but took no time to fade away as her first credit card bill, on her hands, brought up the real picture of outstanding amount of Rs. 80000. Priyanka was in a fix to recover her from this debt in absence of spare cash or savings. She tried to lighten her debt burden by paying minimum amount due every month while paying a huge interest on the rolled back balance. Let’s evaluate, what Priyanka should have done and should do to be better at credit card management: -

1.  A fixed Budget – Credit card should always be aligned to the Budget which you could afford to pay at the end of the month. Plastic money is not a gateway for buying luxuries which you could not afford otherwise.
2. Eye on Credit limit – even if your banker offers you an increased credit limit, be on alert to not to get lured by these offers. A higher credit limit could always push you for impulsive buying.
3. Full payment a ‘must’- Shake-off the idea to pay credit card dues in bits and pieces. Rolled back outstanding balance is charged at as high interest of 1.5% to 3.5 % per month, you stand to gain nothing by extending the payment. Moreover, too many rollovers could effect on your credit score.
4. A list of No-No – Do not use your plastic money to Booze, to buy food items or at Spa, no one would want to worry for money they had spent on relaxing last week. Finally, do not take the privilege to treat your Credit card like ATM card as you might end up paying a higher interest rate on such advances.
5. Be Secure – Register your number on top priority for two reasons, firstly, you could check on misuse as you get an alert every time your card is swiped and secondly, it will also keep check on your spending.

In today’s life, Credit Cards have become significant part of individual’s spending. A wise management of credit card could actually help build stronger credit rating. It depends whether you are in charge of your credit card or vice versa. It could be a savior at real times of needs but Terms & Conditions apply.

Highlight on New Pension Scheme

Retirement planning has become an inevitable part of any individual’s life. Gone are the yesteryears when Provident Fund deposits and other savings were sufficient to lead a comfortable post- retirement life. In line with the growing need to address the retirement needs for the elderly, Government of India had announced National Pension System (NPS) in the year 2004. Some of the vital features are highlighted to understand this much ignored Investment Avenue.

Who can join: - All resident or non-resident Indians in the age of 18-60 can join NPS voluntarily. However, it is mandatory for Central government employees (except armed forces) appointed on and after January 1’ 2004.

Plan Options: - NPS is aimed at benefiting oneself at his retirement; hence, it has been structuralized in order to discourage withdrawal of invested corpus. Plan options offered are: -

Tier I –

•   Non Withdrawable Account.
• First contribution at the time of applying for registration.
•  Minimum Amount per contribution – Rs. 500
•  Minimum contribution per year – Rs. 6000
•  Minimum number of contribution – 01 per year

Tier II –

• Withdrawable Account but an active Tier I account is pre-requisite for opening Tier II account.
•  No limits on number of withdrawals.
•  All features of Tier I account available for Tier II account.
• One way transfer of savings from Tier II to Tier I available.
•  Minimum contribution at the time of account opening – Rs. 1000/-
•  Minimum amount of contribution – Rs. 250/-
• Minimum Account Balance at the end of FY – Rs. 2000/-
• Minimum number of contribution – 01 per year

     Withdrawal Process: –

1.     At any point of time before 60 years of age- At least 80% of the pension wealth to purchase life annuity from IRDA regulated life insurance companies. Rest 20% could be withdrawn in lump sum.
2.          Age 60-70 - At least 40% of the accumulated corpus to purchase life annuity from IRDA regulated life insurance companies. Annuity for greater than 40% could also be purchased. Rest of the corpus could be withdrawn either in lump sum on attaining age 60 or in a phased manner, between age 60 and 70.
3.           Death due to any cause - Option will be available to the nominee to receive 100% of the NPS pension wealth in lumpsum. However, a separate subscription to NPS required in the even where Nominee wishes to continue NPS.

     Asset Allocation: – NPS provided two options for Asset allocation which is Active choice and Auto choice.

     1) Active Choice – Active choice gives you freedom to choose your own allocation based on your risk appetite.Option to select asset class.

            Asset Class E - investments in predominantly equity market instruments.  

            Asset Class C- investments in fixed income instruments other than Government securities. 

            Asset Class G - investments in Government securities. 

     2)Auto choice - It will invest in a life-cycle fund. The fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. Asset allocation in Asset E will be higher at the lowest age of entry and will be raised in Asset G towards approaching age of 60. 

     Tax Benefit: – Contribution in NPS will enjoy benefit under Section 80 CCD of the Income Tax 

     act;however the aggregate deduction under Section 80C, 80CCC and 80CCD is capped at Rs.One Lakh only.

     Expenses: – The annual fund management charge of NPS is as low as 0.0009%.

     Currently, NPS is not very well accepted as an option over Mutual Funds/Equity, more due to lack of incentive and less for other factors (to be discussed later), we hope it to achieve breakthrough in upcoming years

Do SIP, Don’t (S)Stop (I)In (P)Panic

Arunditi , aged 28, was rejoicing on her success to have her  two year old SIP folio redeemed and stopped. She had opted SIP for ten year tenure, on advice of a Mutual Fund advisor but chose to withdraw her SIP in plunging markets. She did not mind losing some value right now as she believed that it could have hurt her more if she had remained invested.

Unfortunately, like Arunditi, most of the investors think the same way. As per the latest reports, over one lakh SIP’s per month were cancelled in the year 2011. SIP (Systematic Investment Plans) have now become Stops In Panic as they could not stand against the panic-stricken reactions of investors. SIP concept was introduced to help investors benefit during market crisis but most of the investors are carried away by their own miscalculations.

Arunditi is happier to own a Smartphone now with the redeemed money, although she had initially sworn in to invest it for accomplishing her abroad travel plans. Nevertheless, she is enjoying making calls abroad with that Smartphone now. SIP intends to accomplish long term goals of the investor; but there existence has been reduced to buying a Smartphone or to support month end deficits. In short, amount invested in SIP for goal of buying a car is redeemed at the end of the month to buy fuel for your two-wheeler.

Let’s try to evaluate how Roopa, unlike Arunditi, has been profited by this outright concept of SIP. Roopa, aged 38, had started her career in the year 2000 and had decided to invest as little as Rs. 2000 in a large and mid-cap fund through SIP every month. She is successfully continuing her SIP and her consistent approach towards investing has paid her off  by growing into a sum nearing 15 Lakhs, which translates into a 23.77%  annualized return, while she had put in 3 Lakh in her investment.  

By now, one point is clear that SIP is undoubtedly a correct approach towards achieving financial goals. Time and again, investment advisors have been reiterating this fact. So when next time markets are declining, you can still maintain your calm with SIP power.

Financial Planning - A Simple Start

If you believe this to be one among the other complicated advices, then take a break. Reality is Financial Planning could be started simply on your own, the way our ancestors had managed their finances ahead of times in absence of information tsunami, which we get these days.

Try these smart yet simple steps to simplify your finances and also to keep a little extra in your Bank account: -

1) Minus a portion out of your Income: - When you get a salary credit of  Rs.20,000, then stop seeing it as a credit of 20000, rather, take it as a credit of Rs.19,000. A meager sum of Rs. 1000 could actually start making difference in few months’ time. It could help you build your emergency fund which is supposed to be around three months of your total expenses.

2) Expenses Track: - This sounds obvious but you do not do it. You probably forget about that popcorn and Coke swipe at a movie theater or vegetables/fruit shopping while you are rushing back on your way home.Few hundreds gone untraced could actually chunk out a large portion of your income.

The best way to track is to write it down but If you dislike the idea of keeping a notebook then you can use all the handy trackers available online. For instance, you could download mobile or desktop application at www.trackeverycoin.com

3) Standing Instruction: – Place a standing instruction in your Bank to pay all the Utility Bills, Rent or your Cell Phone bills that seem to be fixed expenses of the month. The idea is easy, firstly you get away from paying late fee and importantly, you are saving yourself from keeping an option to hold the payment and utilize it for other purpose. If it’s gone, it’s gone.

4) End Month Review: – Initially, reviews will be an eye opener for you to see where your income is going but if done in continuation, you could actually come to a point where you start having surpluses at the end. Trust, these easy steps can get you on your path to set a secure financial future.