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REVERSE MORTGAGE LOAN enabled ANNUITY – OPERATIONAL GUIDELINES

 

INTRODUCTION

 

With increasing longevity, the segment of senior citizens is growing the Indian society. While dependency in old age is incremental, the cost of health care facilities is spiraling, there is a felt need for senior citizens to be supplemented with regular cash flow stream for meeting increased living expenses. For most senior citizens, their house is the largest component of their wealth. Pursuant to announcement, NHB formulated Guidelines to introduce the Reverse Mortgage Loan (RML) product in India through Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs). The product is now being implemented by 25 banks and housing finance institutions all over India.

NHB in association with Star Union Daichi Life Insurance Company Ltd., (SUD Life) and Central Bank of India (CBI), has now conceived an extension of the RML value chain to ensure life-time annuity payments to the senior citizens, a significant improvement over the initial RML product variant which limited the loan disbursement tenure to a fixed term of 20 years causing considerable inconvenience to the borrowers. This will now facilitate the Senior Citizen borrowers to receive assured life-time payments i.e. even after completion of the fixed term of 20 years, with increased quantum of annuity as compared with earlier product variant.

NHB has formulated Operational Guidelines for new RML enabled Annuity product.

1. REVERSE MORTGAGE LOAN enabled ANNUITY (RMLeA)

Lending Institutions: Primary Lending Institutions (PLIs) viz.
 
Scheduled Commercial Banks (SCBs), and
 
Housing Finance Companies (HFCs).
Annuity Sourcing Institutions: Life Insurance Companies.

Borrower Interface: Individual borrowers need to interface only with Lending Institutions. PLIs will source Life-time RMLeA from Life Insurance Company on behalf of borrowers. PLIs shall make RMLeA payments directly to borrower on behalf of Life Insurance Company.

  The Lending Institutions and Life Insurance Companies reserve the discretion to implement the Reverse Mortgage Loan enabled Annuity product as per business practices and their operational convenience

2. ELIGIBLE BORROWERS:

Should be Senior Citizen of India above 60 years of age.
Married couples will be eligible as joint borrowers for financial assistance. In such cases, age criteria for couple would be at the discretion of the PLI, subject to at least one of them being above 60 years of age and other not below 55 years of age. In such cases, the owner of the house property shall be regarded as primary borrower and his/her spouse shall be the second borrower. In case of joint ownerships, the joint owners shall have the option to decide their status as primary or second borrower.
Should be owner of a self- acquired, self occupied residential property (house or flat) located in India, with clear and transferable title. The property should be free from any encumbrances.
The residual life of the property should be at least 20 years.
The prospective borrowers should use that residential property as permanent primary residence.

3. DETERMINATION OF ELIGIBLE AMOUNT OF LOAN:

The amount of loan will depend on market value of residential property as assessed by the PLI, age of borrowers, interest rate or any other factor as may be determined by the PLI.
The minimum property value should not be below Rs.5 lakhs.
The PLIs will have the discretion to determine the eligible quantum of loan. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower.
The maximum Loan to Value (LTV) Ratio may be as mentioned hereunder. However, the PLI may have a upper limit discretion of 10% (or such percentage as notified by the Government).
The PLIs may ensure that the equity of the borrower in the residential property (Equity to Value Ratio - EVR) exceeds 10%.
The PLIs will need to re-value the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state etc. Such revaluation may be done atleast once every five years. The quantum of loan may undergo revisions based on such re-valuation of property at the discretion of the lender.

Age of Borrower

Maximum Loan to Value Ratio

Between 60 and 70

60%

Between 70 and 80

70%

80 and above

75%

 

4. NATURE OF PAYMENT:

Periodic: Monthly, Quarterly, Half-yearly or Annual) as desired by borrower.
Lump-sum.
Line of Credit.
Borrower may opt for any combination of the above, subject to terms of PLI.
 
a. PERIODIC PAYMENT OPTIONS:
Borrower to initially exercise option between:
RMLeA (without return of purchase price): Life-time Annuity payment till demise of borrower. In case spouse is made a co-borrower, the Annuity can be procured separately in their respective individual names on a proportionate basis that they may decide. OR
 

Indicative RMLeA Payments

 

 

 

 

Net Monthly RMLeA*

Age

Property Value

LTV

Option-1

Option-2

60-64

1000000

60%

3209

2191

65-70

1000000

60%

3737

2267

70+

1000000

70%

5452

2904

* Net of Servicing Charges upto 1.5%p.a subject to detailed terms

The above estimates are indicative and the actuals may vary depending upon the age of borrower and other terms of the PLI.

RMLeA (with return of purchase price): Life-time annuity payment till demise of borrower. After demise of borrower, purchase price (initial net premium amount) will be returned. In case of Joint borrowers under this option, the Annuity shall first be sourced in the name of the primary borrower. On death of the primary borrower, PLI shall use the returned purchase price to re-purchase Annuity in the name of the second borrower at annuity rates applicable for his/her age at time of re-purchase, so that the flow of Annuity continues to the surviving second borrower.

RML enabled ANNUITY

S.No.

Feature

Option 1

Option 2

1

Lending Institution

Scheduled Commercial Banks and Housing Finance Companies

Scheduled Commercial Banks and Housing Finance Companies

2

Annuity Institution

Life Insurance Company

Life Insurance Company

3

Eligible Borrowers

Senior Citizens above 60 years and spouse provided that he/she is above 55 years

Senior Citizens above 60 years and spouse provided that he/she is above 55 years

4

Borrower Interface

Lending Institution

Lending Institution

5

Security

Mortgage of House Property in favour of Lending Institution

Mortgage of House Property in favour of Lending Institution

6

Benefits on Survival

RML enabled Life Time Annuity

RML enabled Life Time Annuity

7

Annuity Benefits on Death of Borrower/s

No

Return of Purchase Price *

8

Joint Borrowers

Joint borrowers can obtain separate Life time Annuities

On death of primary borrower, co-borrower becomes automatically eligible for receiving Annuity

9

Prepayment of Loan

Annuity will continue to flow till borrower's demise

Annuity will continue to flow till borrower's demise

10

Servicing Fees

Maximum 1.50% p.a.  ( of Principal outstanding)

Maximum 1.00% p.a.  (of Principal outstanding)

11

Whether taxable

Yes. In hands of RML enabled Annuity recipients

Yes. In hands of RML enabled Annuity recipients

* Purchase Price returned by Life Insurance Company on death of last surviving borrower shall be used by Lending Institution towards partial settlement of Loan dues of borrower/s
 
b. PERIODIC PAYMENT TERMS:
PLI to source Life-time RMLeA from Life Insurance Company on behalf of borrower. Minimum purchase price of the Policy is Rs. 2 lakh. However, there is no upper limit. PLI to make RMLeA payments directly to borrower on behalf of Life Insurance Company.
The borrower shall be offered to opt for monthly or periodic payments based on Annuity purchased from an Insurance Company (approved by IRDA) by PLI on behalf of borrower. The borrower shall instruct PLI to remit eligible Loan quantum, in part or in full, to Insurance Company as Annuity premium. Such remittance of loan amount towards Annuity premium can be either in part or in full as per schedule and terms of Insurance Company.
Borrower to receive the periodic payment in pre-designated bank account. The Insurance Company shall remit the Annuity payments to the borrower by cheque or electronic transfer of the Annuity amount to a pre designated account of the borrower in a scheduled commercial bank approved by the RBI. Such payments of Annuity shall be based on a list of the borrowers to be forwarded by the PLI to the Insurance Company every month, at least five working days before the Annuity payment date.
Option exercised under RMLeA cannot be terminated, surrendered, or cancelled.
Joint borrowers will have the option to instruct the PLI to source the Annuity separately in their respective individual names on a proportionate basis that they may decide.
A borrower may also opt for one or more annuity options, subject to detailed terms of the Life Insurance Company and PLI.
RML enabled Annuity (with Return of Purchase Price option): In case of Joint borrowers under this option, the Annuity shall first be sourced in the name of the primary borrower. On death of the primary borrower, the PLI shall use the returned purchase price to re-purchase Annuity in the name of the second borrower at annuity rates applicable for his/her age at time of such re-purchase. The Annuity shall thereafter flow in to the second borrower.
 
c. LUMP SUM PAYMENT TERMS:
Lump-sum payments may be conditional, subject to discretion of PLI.
The end-use may be for meeting medical or related expenses, subject to discretion of PLI.
Maximum lump-sum payment may be 25% of eligible loan amount subject to cap of Rs.15 lakh or such amount as notified by Government of India.
 
d. OTHER TERMS:
The nature of payments will be decided in advance as part of the RMLeA covenants.
All covenants/ conditions stipulated by the PLIs shall be disclosed to the borrower in advance.
The Loan component to the borrower shall be the sum of lump sum loan amount received directly from PLI and aggregate Annuity Premium paid by PLI to Insurance company.
The borrower may be qualified to receive Bonus from the Insurance Company every year if the investment return of the Insurance Company exceeds 6%. In such a case, upto 80% of the excess return shall be distributed as cash bonus automatically to annuitants.
The PLI shall ensure survival existence of borrowers atleast once every year and inform Insurance Company.

5. REVERSE MORTGAGE REDEMPTION RESERVE:

The PLIs may set aside a part of the loan amount as Reverse Mortgage Redemption Reserve (RMRR) which shall be used for the settlement of the loan dues on closure of RML. The maximum amount of RMRR shall be as given below.

RML-Annuity Option

Maximum RM Redemption Reserve

RML-Annuity
(With Return of Purchase Price)

Upto 5% of Property  Value

RML-Annuity
(Without Return of Purchase Price)

Upto 10% of Property Value

6. ELIGIBLE END USE OF FUNDS :

The loan amount can be used for the following purposes:
Up gradation, renovation, extension, improvement, maintenance and insurance of house.
Medical purposes, meeting increased living expenses or any other consumption need.
Use of RMLeA for speculative, trading and business purposes shall not be permitted

7. PERIOD OF LOAN:

The maximum loan disbursement tenure shall be till the demise of the borrower.

8. INTEREST RATE:

The interest rate (including the periodic rest) to be charged on the RMLeA to be extended to the borrowers may be fixed by PLI in the usual manner based on risk perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms and conditions in a transparent manner, upfront to the borrower.

 

9. SECURITY:

The RMLeA shall be secured by way of mortgage of residential property, in a suitable form, in favour of PLI.
Commercial property will not be eligible for RMLA.

10. VALUATION OF RESIDENTIAL PROPERTY:

The residential property should comply with the local residential land-use and building bye laws stipulated by local authorities, with duly approved lay-out and building plans.
The PLI shall determine the market value of the residential property through their external approved valuers. In-house professional valuers may also be used subject to adequate disclosure of the methodology.
The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLI, which in any case shall be at least once every five years. The methodology of the revaluation process and the frequency/schedule of such revaluations shall be clearly specified to the borrowers upfront.
PLIs are advised not to reckon expected future increase in property value in determining the amount of RMLeA.

11. TAXATION:

All payments under reverse mortgage loan are exempt from income tax under Section 10(43) of the Income-tax Act, 1961. However, periodic annuity payments are subject to tax under Section 17, 56 and 80CCC of the Income Tax Act and taxable in the hands of the annuity recipients.

 

12. PROVISION FOR RIGHT TO RESCISSION:

As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, Senior Citizen borrowers may be given up to three business days to cancel the transaction, the “right of rescission”. The PLI may therefore consider at its discretion, to make the annuity premium payments to the Insurance Company after three business days after the finalization of the transaction. If the lump sum loan amount has been disbursed directly to the borrower, the same will need to be repaid by the borrower within this three day period. However, interest for the period may be waived at the discretion of the PLI. It may also be mentioned that the Insurance Company has no free look provision with the Scheme.

13. LOAN DISBURSEMENT BY LENDER TO BORROWER:

The PLI will make the RMLeA payments including annuity received from Life Insurance company directly to the borrower in the pre-designated bank account, except in cases pertaining to, payments to Insurance Companies in respect of annuity premia, contractor(s) for the repairs of borrower’s property, payment of property taxes or hazard insurance premiums from the borrower’s account set aside for the purpose, on-going service charges to the PLI and any money returned by the Life Insurance company on demise of borrower (applicable in annuity option with return of purchase price).
The PLI will have the discretion to decide the quantum and mode of payment depending on the state and market value of the property, age of the borrower and other factors. The rationale behind the decision of quantum and mode of payment shall be clearly disclosed to the borrowers.

14. UPFRONT-ONE TIME LOAN PROCESSING CHARGES:

The PLIs will provide in writing, a fair and complete package of reverse mortgage loan material and specimen documents, covering inter alia, the benefits and obligations of the product.

The PLI shall charge loan processing charges/fees which may be directly accounted from the payment made/to be made to the borrower. This fee shall, inter alia, include the customary and reasonable fees and charges that may be collected by the PLIs from the borrower. The cost for any item charged to the borrower shall normally not exceed the cost paid by the lender or charged to the lender by the provider of such service(s). Such items may include:

Origination, Appraisal and Inspection Fees.
Property Verification and Title Examination Fees
Legal Charges/ Fees.
Survey and Property Valuation charges.
A detailed schedule of all such costs will clearly be specified and provided to the prospective borrowers upfront by the PLIs.

15. ON-GOING SERVICING CHARGES:

The PLI shall be entitled to receive On-going Service Charges up to the extent of 1.50% of the loan principal outstanding on monthly/periodic basis net of RMRR, lump sum payment made (if any). The maximum service charges shall be as given below.

RML-Annuity Option

Maximum Service Charges

RML-Annuity
(With Return of Purchase Price)

Upto 1.00% p.a of Loan (Principal) Outstanding
net of RMRR, Lump Sum payment made (if any) and other upfront loan processing charges

RML-Annuity
(Without Return of Purchase Price)

Upto 1.50% p.a of Loan (Principal) Outstanding
net of RMRR, Lump Sum payment made (if any) and other upfront loan processing charges

The on-going servicing fees may be deducted from the annuity payments before passing it on to the borrowers/beneficiaries.

 

16. SETTLEMENT OF LOAN:

The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or to relatives. Typically, a "permanent move" may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. PLIs may obtain such documentary evidence as may be deemed appropriate for the purpose
Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Residential Property.
The RMRR (if retained as deposit with the bank) shall be closed and the proceeds may be directly adjusted with the loan account of the borrower.
Any money returned by the Insurance Company on demise of the last surviving borrower, as per the contracted terms, shall be used by the PLI towards partial settlement of the loan dues. This is applicable in respect of Annuity with Purchase Price Option, the Purchase price shall be payable by Insurance Company, as per its terms, directly to the PLI which shall use it towards partial settlement of Loan dues.
The borrower(s) or his/her/their heirs/estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.
A reasonable amount of time, say up to 2 months may be provided when RMLeA repayment is triggered, for house to be sold.
The balance surplus (if any) remaining after settlement of the loan with accrued interest, shall be passed on to the legal heirs/estate/beneficiaries of the borrower.
Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer. A borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.

17. PREPAYMENT OF LOAN BY BORROWER(S):

The borrower(s) will have option to prepay the loan at any time during the loan tenor.
The PLIs are advised not to levy prepayment penalty/charge for such prepayments.
In case of such prepayment of loan amount by the borrower to the PLI, the PLI shall release the mortgage of the house property and return the related documents to the borrower. The PLI shall inform the Insurance company about such prepayment. The borrower shall continue to receive the Annuity payments directly from the Insurance Company in the pre designated bank account and the Insurance Company shall take the responsibility to ensure the compliance of the terms of Annuity.

18. LOAN COVENANTS:

The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence.
Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan products carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.
Loan Agreement: The PLIs shall enter into a detailed loan agreement setting out therein the salient features of the loan mortgage security and other terms and conditions, including disbursement and repayment of the loan, in addition to the usual provisions, which are ordinarily incorporated in a mortgage loan document.
The loan agreement may also include a provision that the borrower shall not make any testamentary disposition of the property to be mortgaged and even if he or she does so, it would be subject to the mortgage created in favour of the lending institution. In such a case, the borrower shall make testamentary disposition of the mortgaged property in favour of any of his/her relatives, subject to the discharge of the mortgage debt by such legatee and a statement that the heirs shall not be entitled to challenge the validity of the mortgage as also the right of the mortgagee to enforce the mortgage in the event of death of the borrower unless the legal representative is willing to undertake the responsibility for discharging in full the amount of loan and accrued interest thereof.
In addition, the PLI may also consider, at its discretion, obtaining a Registered Will from the borrower stating, inter-alia, that he/she has availed of RMLA from the PLI on security by way of mortgage of the residential property in favour of the PLI, meaning thereby that in the event of death of the borrower (and co-borrower, if any), the mortgagee is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s).
The PLIs may consider, at its discretion, taking an undertaking from the prospective borrower that the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at the time of availment of RML facility as per which the property will vest in his/her spouse/beneficiary name after his/her demise. The borrower will also undertake not to make any other ‘Will’ during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the PLIs favour by way of creation of mortgage on the immovable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower’s death.
The loan agreement shall also contain the documents pertaining to Insurance Company’s Life-time Annuity Policy.
The PLI will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities.
The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges and statutory payments.
The PLIs will ensure that borrower(s) are maintaining the residential property in good and saleable condition.
The PLI may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures.
The PLI reserves the right to inspect the residential property/premises or arrange to have the residential property/premises inspected by its representatives any time before the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of such inspections.

 

19. TITLE INDEMNITY/INSURANCE:

The PLI shall obtain legal opinion for ensuring clarity on the title of the residential property.

20. FORECLOSURE:

The loan shall be liable for foreclosure due to occurrence of the following events of default.
If the borrower has not stayed in the property for a continuous period of one year.
If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.
If borrower(s) declare himself/herself/themselves bankrupt.
If the residential property so mortgaged to the PLI is donated or abandoned by the borrower(s).
If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house; adding a new owner to the house's title; changing the house's zoning classification; or creating further encumbrance on the property either by way taking out new debt against the residential property or alienating the interest by way of a gift or will.
Due to perpetration of fraud or misrepresentation by the borrower(s).
If the government under statutory provisions, seeks to acquiring the residential property for public use.
If the Government condemns the residential property (for example, for health or safety reasons).
 

The Insurance Company’s Annuity Policy shall be rendered null and void ab-initio and all moneys paid in respect of that assurance of life-time annuity shall belong to the Insurance Company, if any conditions herein mentioned, or any endorsements made or any variations evidenced by exchange of documents hereto are contravened; or it is found that a statement made

in the member data given to the Company; or.
in any other document leading to the issue of the Insurance Company’s Annuity Policy; or
in any other document necessary to keep such Annuity Policy in force
any material matter of fact was suppressed,
then, and in every such case (but subject to the provisions of Section 45 of the Insurance Act, 1938), all claims to any benefit under the Annuity Policy of the Insurance Company shall cease, excepting insofar as whatever relief may be granted as per the law.

 

21. OPTION FOR PLI TO ADJUST PAYMENTS:

PLI shall revalue mortgaged property at least once every five years and reserve option to make upward revisions in loan amount at such frequency or intervals based on such revaluation.
Borrower shall be provided with an option to accept such revised terms and conditions for furtherance of the loan.
If the Borrower does not accept the revised terms, no further payments will be effected by the PLI. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The accumulated principal and interest shall become due and payable as mentioned in clauses (16) and (20). The Annuity Payments as received from the Insurance Company shall continue to flow to the borrower as per the terms agreed before the review.

22. COUNSELING AND INFORMATION TO BORROWERS:

The PLIs will observe and maintain high standards of conduct in dealing with the Senior Citizens and their families and treat them with special care.
The PLIs will observe and maintain high standards of conduct in dealing with the Senior Citizens and their families and treat them with special care.
The PLIs shall clearly and accurately disclose the terms of the RMLeA without any ambiguity.
The PLIs should clearly explain to the prospective borrowers the terms and conditions of RMLA, the methodology followed for valuation of the residential property, the method of determination of eligible quantum of loan, quantum set aside as the Mortgage Redemption Reserve, the frequency of re-valuation and review of terms and related aspects of the RMLeA.
The Insurance Company shall clearly disclose the terms of annuity to the PLI and the borrower, before the entering into the contract.
The PLIs may suggest to the Senior Citizens to nominate their ‘personal representatives’ usually a close relative who the PLI can contact in the event of any potentialities.
The PLIs may counsel the prospective borrowers about the possible impacts to the borrowers due to adverse movements in interest rates and property price fluctuations.
The PLIs shall clearly specify all costs that are associated with the transaction, to Borrower(s).
The PLIs shall in no way assert or imply to the borrower(s) that the borrower(s) is/are obligated to purchase any other product or service offered by the PLI or any other associated institution in order to obtain a reverse mortgage loan.
Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reverse mortgage transaction.
Overall, the PLIs and Insurance Companies shall treat the Senior Citizen borrower fairly.
 
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