Reverse Mortgage: What is it?
A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan.
How does it work?
In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Instalments (EMIs).
In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.
The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one in which, the tenure is 15 years and the owner of the house and his/her spouse continue to live in the house till their death -- which can occur later than the tenure of the reverse mortgage.
Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house.
What are the features of this loan?
The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India [ Get Quote ] have the following features:
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.
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.
How is the loan paid?
With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.
In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.
When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.
The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.
What happens after the death of one or both of the spouses?
If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.
How much of an annuity income can my house generate using reverse mortgage?
The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12 per cent to 14 per cent.
What is a loan to value ratio?
Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent.
So, for e.g., if you pledge a property worth Rs 60 lakh (Rs 6 million), then the loan amount that you can get is Rs 36 lakh (Rs 3.6 million).
Does a person's age affect the amount of annuity paid?
It certainly does. Higher the age, higher the annuity! Everything else remains the same.
Why is this scheme not popular?
Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps because better awareness had not been created about the product.
Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years.
The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.
ANOTHER ARTICLE
What is reverse mortgage?
Increased life expectancy has lead to the increase in the costs of living and medical expenses. This makes it difficult for many senior citizens that lack a regular income to live a life of dignity. Reverse mortgage is the solution introduced by the Union Government of India in 2007 helps senior citizens.
Understanding the concept of reverse mortgage better:
Reverse mortgage is the opposite of a conventional housing loan that needs to be paid back with interest over a period of time. Reverse mortgage helps senior citizens having a residential property to receive a regular income against its mortgage. The borrower and his/her spouse are allowed to stay in the place of residence until both die, aiding the living of a dignified life by senior citizens.
Workings of reverse mortgage:
A senior citizen couple should necessarily own a flat or house. Then they can pledge the property for a monetary value agreed upon by the bank. The value is generally fixed considering the present property values, demand and also the condition of the property. The bank starts periodic payment as a loan that is decided after consideration of margin of interest costs and price fluctuations in the property. It is an ideal solution for senior citizens that have residential property, but no finances for regular day to day expenses and medical aid. The borrower’s interest in the property decreases once the reverse mortgage EMI begin.
Guidelines for reverse mortgage:
The guidelines set by the Reserve Bank of India state:
Ø The maximum amount of the loan given generally as EMIs cannot exceed 60% of the property value. In addition the minimum period of the mortgage is 10 years, and maximum 15 years. However some banks have been recently offering tenure of about 20 years.
Ø The borrower can avail of the loan in parts every month, every quarter, every year or in a lump sum.
Ø The lender/bank would revaluate the property once in 5 years. If the value of the property has increased, the borrower has the option to ask for an increase in the amount of loan. He can also ask for the additional amount to be given in a lump sum.
Ø The installments or lump sum received in a reverse mortgage is a loan and not an income. Hence no tax is payable on it. However he has to pay capital gains tax when the property is taken for the borrower for the repayment of the loan on the mortgage.
Ø The interest paid on the reverse mortgage could be floating (fluctuating) or fixed, with this rate depending largely on the interest rates prevailing in the market.
Eligibility for reverse mortgage:
A senior citizen can avail of reverse mortgage on his/her house or property when:
Ø He/she is above the age of 60 and his spouse that is a co-applicant is above 58 years of age.
Ø The property is the permanent residence of the individuals and is self-occupied. The property should be self-acquired and located in India. The title should be clear of the borrower’s ownership.
Ø It is mandatory for the property to be free of encumbrances and it should have a minimum life of about 20 years.
Settlement of reverse mortgage:
Ø The reverse mortgage loan is payable on the death of the last surviving life partner. It could also become payable when the borrower sells off his/her property. In such cases the bank gives the choice to the heirs to settle the loan with accumulated interest. Otherwise the bank arranges to recover the same with the sale of the residential property.
Ø Any extra amount that remains after the loan with interest and expenses has been settled is passed on to the legal heirs. If the sales proceeds are much less than the loan, the bank. In case of losses that could occur due to wrong estimation by the bank is borne by them.
Ø The loan could be foreclosed when the borrower has not continuously stayed in the house for a year or has failed to pay property taxes or insure the house. The loan is also foreclosed when the borrower turning bankrupt, donates or abandons his property. In addition renting a part of the house, adding an extra name to the ownership could all affect the lender’s interests and lead to foreclosure of the mortgage. Government statutory provisions could also require it.
Some other highlights of reverse mortgage include the borrower’s option to prepay the loan with interest. Also one or both spouses could outlive the period of the tenure. Then the bank will stop payment of monthly installment. They will however wait for the both the borrowers to die before settlement. Reverse mortgage involve long, tedious, difficult and complicated procedures. In addition they have no provisions for increase in monthly payouts.
Lastly reverse mortgage has failed to gain much popularity in India, with marketing strategies being inadequate. The reason is also that many banks are fixing the maximum limit of loan. The resentment among the heirs and family sentiments are also some of the other reasons. It is true however that reverse mortgage is the solution for financial sufficiency in lives of most senior citizens.
