Mr. Sharma, a central government retiree, has been living with his wife in an independent home for the last 35 years. His two sons, both settled in New York, have no intention of moving base to India. Husband and wife, well past in their sixties do not wish to live with their sons in a foreign country. Mr. Sharma, a heart patient and his wife a diabetic, have a substantial monthly medical expenditure. Not satisfied with his pension, and not wanting to depend on his sons, for household expenditure as well as medical care, he approached his bank for a solution. The bank advised him to opt for Reverse Mortgage, to ease his monthly expenses.
The reverse mortgage scheme offered by some of the leading banks in India could bring the required answers to the suffering senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream due to its illiquid nature.
This scheme was launched in India in budget Session 2007 – 2008.
What is it?
A reverse mortgage is the “opposite” of a conventional home loan. A reverse mortgage enables a senior citizen to receive a regular stream of income from a lender (a bank or a financial institution) against the mortgage of his home. The borrower (i.e. the individual pledging the property), continues to reside in the property till the end of his life and receives a periodic payment on it.
The good thing is that the person who ‘reverse mortgages’ his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it.
Where is the catch?
The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the placce, and to recover the loan. It passes on any extra amount to the legal heirs. This concept is particularly popular in the west.
# Any house owner over 60 years of age is eligible for a reverse mortgage.
# The maximum loan is up to 60% of the value of residential property.
# The maximum period of property mortgage is 15 years with a bank or HFC.
# The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
# The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years.
# The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
# Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.
Eligibility Criteria for reverse mortgage
# House owners above the age of 60 years. If spouse is a co-applicant, then she should be above 58 years. Owners of a self-acquired, self-occupied residential house or flat, located in India. The titles should be clear, indicating the prospective borrower’s ownership of the property.
# Property should be free from any encumbrances. The life of the property should be of minimum 20 years. Property should be the permanent primary residence of the individuals.
Period of reverse mortgage loan.
The loan under reverse mortgage shall not be granted for a period exceeding twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.
Settlement of a reverse mortgage
A reverse mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property. Any extra amount, after settlement of the loan with accrued interest and expenses, through the sale of the property, will be passed on to the legal heirs.
# Prepayment of loan: Borrowers could prepay the loan at any time during the tenor of the loan, at no prepayment penalty or charges.
# Death of one of the spouses: If one of the spouses dies, the other can still continue living in the house. Only on death of both, settlement of the loan takes place.
Drawbacks of reverse mortgage
# Lengthy documentation procedures: Banks require various documents of the property. For a senior citizen this procedure could be tedious, complicated and difficult to understand.
# Fixed monthly amounts: The monthly payouts are fixed. There is no provision to increase this amount in case of an emergency or contingency.
Though introduced in 2007, Reverse Mortgage has not gained much popularity in India for the following reasons. Inadequate marketing of the product. Recent reports indicate that many of the senior citizens are not aware of the existence of such a product. Reverse Mortgage is a relatively new concept in India.
It would take some time for a change in mind set of individuals to accept it. As a financial tool, Reverse Mortgage is ideal to augment a senior citizen’s income in his years ahead. Despite all its shortcomings in India, it could make good the shortfall in one’s pension or income to live a quality life ahead.
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