On the house: Elders can now own and earn

Senior citizens can now live off their homes, literally. Taking a cue from developed countries, the government has announced its sanction for reverse mortgage products in the country. In a reverse mortgage, senior citizens can avail of a loan against property owned by them without having to pay back monthly installments. 

The finance minister announced that the National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a reverse mortgage under which a house-owning senior citizen can avail of a monthly stream of income against the mortgage of his or her house. 

He or she can continue to remain the owner and occupy the house throughout his/her lifetime, without repayment or servicing of the loan. 

Reverse mortgage products are already available to citizens in countries like the US, the UK, Australia and Spain. In a normal mortgage, a customer will avail of a loan from a bank to buy a house and then repay it in monthly installments. 

In reverse mortgage, a senior citizen can pledge his/her house to a bank and get a lumpsum amount or monthly payments, based on the value of the property. They don't have to pay back any installments to the bank till they continue to stay in their house. The large Indian banks have welcomed the new development. Says V Vaidyanathan, retail banking head, ICICI Bank, "We like the concept and look forward to launching our products soon." 

Says an executive from HDFC, India's leading housing finance company, "This is a welcome development and we are awaiting NHB to announce further details of the product. We are certainly interested in launching our products in this space." 

In a typical deal, the bank or finance company will value the house using a standardised norm and arrive at a lumpsum or monthly equated amount payable over a specified period of time. In an earlier note prepared by NHB, a lending rate of 6% and a tenure of 20 years were used to arrive at amounts payable to senior citizens. 

At present, however, there is some ambiguity on how the income from mortgaging the house would be treated in the hands of senior citizens. There are no clear rules if such a payment would be taxed or not. 

Tax experts are, however, confident that since each payment creates additional loan, the payment on mortgaging property will not be taxed. 

Though the scheme has been announced formally in this year's budget, companies like Dewan Housing are already offering a reverse mortgage product called Saksham to senior citizens with an in-principle approval from NHB. 

The product is modelled as a regular income product for customers above 60 years of age who have been living in their house for at least one year. Says an HDFC official, "We wanted to be sure of the rules before we put out our products." 

 

PRE-LAUNCH V/S SOFT LAUNCH

Pre-launch, a highly-debated issue in real estate, means raising money from the public for projects which are yet to get regulatory approval in the form of licence and clearances.

In short, it is like selling a house which has not even had its foundation stone laid. Soft launch is legally permissible, but it is different. When investing, an individual needs to understand between the two.

Q. What is the difference?
A. While both are meant to attract investments before a project is actually ready, in the case of pre-launch, a builder seeks investments even before seeking regulatory approvals are in place. In case of soft launch, the move follows after receiving all the necessary approvals.

Q. How can an investor understand the difference?
A. One can make it out by the mode of payment asked for. Since pre-launch is an illegal practice, a builder will insist on cash payment. An investor should understand that only the amount one pays in cheque is the actual and official valuation of the property that he is investing in.

Q. Why then are there takers for pre-launch?
A. Investors are often lured by the significantly low prices on offer. On an average, a property's pre-launch price is less than one-third the price after actual launch. But since the entire transaction is through a benami deal, the investor often does not have an enforceable right.

Q. What is the area that should be considered while buying a flat?
A. There is no regulation pertaining to this issue, and investors are often at the mercy of whims and fancies of the developers. However, the government has emphasised that carpet area, and not super area, should be the basis of all transactions. A regulation pertaining to this is expected to be introduced in Parliament soon.

Q. What's the difference between carpet & super area?
A. Carpet area is the actual built-up area of a property. Super area also includes the value-add spaces. The difference is particularly striking in case of apartments, where super area includes space taken up by facilities such as lift, parking and open space.

Q. Do we have a regulator?
A. The ministry is planning to set up a real estate regulator to bring about more transparency in the sector. The proposed regulator will make sure that developers stick to guidelines. It will also be mandated to ensure that consumers fulfill their commitments.

Q. What if a developer does not deliver property on time?
A. Regulations pertaining to developers' adherence to a timeframe is not clear as yet. However, if the proposed bill for realty regulator is instituted, deadlines will become legally binding.