Life expectancy in India has steadily increased in recent decades. But that also applies to the costs of medical treatment. For seniors, who do not have a steady income or financial support from children, this can lead to a financial crisis. Furthermore, the days are gone when the elderly lived with their sons and daughters, depending on them for their amenities and medical needs. The reverse mortgage, introduced by the government of the Union in 2007, is an answer to such problems faced by seniors and gives them a dignified life.
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What is Reverse Mortgage?
Mr Sharma, a retiree from the central government, has lived with his wife in an independent house for 35 years. His two sons, both based in New York, have no plans to move to India. Husband and wife, well over sixty, do not want to live abroad with their sons. Mr. Sharma, a heart patient and his wife, a diabetic, have significant monthly medical expenses. Unsatisfied with his retirement and not wanting to depend on his sons for both household expenses and medical care, he approached his bank for a solution. The bank advised him to opt for Reverse Mortgage to ease his monthly payments.
In simple terms, a reverse mortgage is the “opposite” of a conventional home loan. A reverse mortgage allows a senior to receive a regular stream of income from a lender (a bank or financial institution) against their home’s mortgage. The borrower (i.e. the person who pledges the property) continues to live in the property until the end of his life and receives a periodic payment for it.
How does a reverse mortgage work?
When the house is pledged, the monetary value is determined by the bank based on the demand for the property, current real estate prices and the condition of the house. The bank then pays out a loan amount to the borrower in the form of periodic payments, allowing for a margin for interest charges and price fluctuations. The periodic payments, also known as reverse EMI, are received by the borrower over a fixed term. With each payment, monthly or quarterly, equity or individual interest in the home decreases.
A reverse mortgage is an ideal option for seniors who need regular income, or if the property is illiquid for some reason.
General Reverse Mortgage Guidelines
The Reserve Bank of India has issued the following guidelines for a reverse mortgage.
- The maximum loan amount is a maximum of 60% of the value of the home.
- The maximum term of the mortgage is 15 years and the minimum is 10 years. Some banks now also offer a maximum term of 20 years.
- Option of monthly, quarterly, annual or lump sum loan payment.
- Once every 5 years, the revaluation of the property must be carried out by the lender.
If at that time the valuation has increased, borrowers have the option to increase the amount of the loan. In that case, they receive the periodic amount at once.
- Amount received through reverse mortgage is a loan and not income. So no tax is levied. However, a borrower is subject to capital gains tax at the time of disposal of the mortgaged property by the mortgagee for the purpose of recovering the loan.
- Reverse mortgage interest rates can be fixed or variable. The rate would be determined by prevailing market interest rates.
Eligibility Criteria for Reverse Mortgage
- Homeowners over 60 years of age. If the spouse is a co-applicant, she must be over 58 years of age.
- Owners of a self-acquired, self-occupied house or apartment, located in India. Titles must be clear, indicating ownership of the potential borrower’s property.
- Properties must be free of all encumbrances.
- The life of the property must be at least 20 years.
- Property must be the persons’ primary permanent residence.
Settlement of a reverse mortgage
A reverse mortgage loan becomes due when the last remaining borrower dies, or if the borrower chooses to sell the home. The bank first gives the next of kin an option to repay the loan together with the accrued interest, without selling real estate. If the surviving relatives are unable to settle the loan, the bank chooses to recover this from the sale proceeds of the home.
Any additional amount, after settlement of the loan with accrued interest and costs, from the sale of the property, will be passed on to the legal heirs. If the sale proceeds are less than the accumulated principal plus interest, the loss will be borne by the bank. This loss can occur in cases where the bank’s original estimate is not in line with the movement in the real estate market.
Other Reverse Mortgage Highlights
- Loan Prepayment: Borrowers can repay the loan early at any time during the term of the loan, with no penalties or prepayment fees.
- Surviving the term of the loan: If the borrower survives the term of the loan, he can continue to live in the house. However, the lending institution can stop the monthly payments. Settlement of the loan will only take place after the death of the borrower.
- Death of one of the spouses: If one of the spouses dies, the other can still live in the house. The loan will not be settled until both of them die.
- Foreclosure: The loan can be foreclosed by the lender if:
- The borrower has not stayed in the house for a continuous period of one year.
- The borrower has not paid property taxes and has not insured the property
- If the borrower declares himself bankrupt.
- If the mortgaged property is donated or vacated by the borrower.
- If the borrower makes changes to the home, this can affect the security of the loan for the lender. This could be renting out part or all of the house, adding a new owner to the title of the house or creating further taxes on the property.
- If the government wants to acquire or condemn the property on the basis of legal provisions for health or safety reasons.
Disadvantages of Reverse Mortgage
- Long Documentation Procedures: Banks require various documents from the property. For an elderly person, this procedure can be tedious, complicated and difficult to understand.
- Fixed monthly payments: The monthly payments are fixed. There is no provision to increase this amount in case of emergency or unforeseen circumstances.
Popularity of the scheme in India
Although Reverse Mortgage was introduced in 2007, it has not become very popular in India for the following reasons.
Insufficient marketing of the product. Recent reports show that many seniors are unaware of the existence of such a product.
- Many banks offering reverse mortgage have limited the maximum loan amount available to individuals to a maximum amount of Rs 50 lakhs to 1 crore.
- Children hate a reverse mortgage because they see it as giving away their parental home or inheritance.
Reverse Mortgage is a relatively new concept in India. It would take some time for a change in individuals’ thinking to accept it. As a financial tool, Reverse Mortgage is ideal for increasing a senior’s income in the coming years. Despite all its shortcomings in India, it could make up for the lack of pension or income to live a good life.
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