Retirement is an addition to one’s life where the person can sit back and enjoy the beauty of nature. This phase of life usually treats each person differently. For instance it maybe an extended holiday or honeymoon period for some while for others it may become a struggle for sustenance if not planned well. Therefore, in the year 2007 the finance minister of India introduced Reverse Mortgage Loan. This product made life simpler for senior citizens and ensured that they were not depended on kids, relatives, others for financial help or support.
Reverse mortgage loan functions exactly opposite to a conventional home loan. While in a conventional home loan one borrows a huge amount at the beginning and then pays it back over a period of time using EMIs, in case of a reverse mortgage loan, the bank or a financial institution gives a regular annuity amount to the senior citizen against the mortgage home until the end of life.
Lets understand the way reverse mortgage work, when the home is pledged, its monetary value is arrived at by the bank on the basis of the demand for the property, current property prices and the condition of the house. The bank then disburses a loan amount to the borrower in the form of periodic payments, after considering a margin for interest costs and price fluctuations. The periodic payments also known as reverse EMI are received by the borrower over fixed loan tenure. With each, the equity or the individual’s interest in the house decreases. So under this scheme, if one has a home that has a value of Rs 1 crore and assuming that the loan to value ratio (LTV) of the home would be valued at Rs 60 lakh. Under reverse mortgage one is first entitled a lumpsum amount of Rs 15 lakh or 50% of the value of the property, whichever is lower. In this case it would be 15 lakhs. Of the balance Rs 45 lakh (the difference between the first instalment and LTV), the borrower has teh option of investing this amount on annuity schemes of insurance companies.
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. The amount of annuity in this product depends upon the age of the applicant. This means higher the age higher is the returns one receives from the bank. But one of the major drawbacks to this loan is that the amount of annuity is fixed and can’t be increased in any emergency circumstances.
The most common question asked by the senior citizens about having reverse mortgage loan is the settlement procedures of the loan which can be a settled through prepayment during the tenure of the loan at no penalty. And, if the borrower outlives the tenure of the loan he could still continue to live in the house, but the bank ceases the monthly payments and the full and final settlement is done only after the borrower’s death.
Other reasons for the loan to be foreclosed by the banks are if the borrower has not stayed in the house for a continuous period of one year, not paid property taxes, declares himself as bankrupt sells/ rents the mortgage property or if the government under statutory provisions, seeks to acquire the residential property for health or safety reasons.
Reverse mortgage loans are a boon for senior citizens, but it is not so popular in India for several reasons. Firstly, because of the emotional attachment Indians have towards they are housing property and their children resentment as they think it as giving away their family legacy. Secondly, poor marketing by the banking sector to sell the product, which is leading to lack of knowledge over the product’s benefits and drawbacks. Moreover, the long queues and documentation procedures at the banks churns out the blood and energy out of the senior citizens.
Guidelines by RBI on Reverse Mortgage Loan
– Any house owner over 60 years of age is eligible for a reverse mortgage.
– The maximum loan is up to 60 per cent of the value of the residential property.
– The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).
– 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.
Sukanya Kumar, Founder and Director, Retail lending.com