What is Reverse Mortgage?
A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. The finance minister of India introduced this scheme in 2007 which is already well known concept in the West. “Reverse mortgage”, as its name suggests, in simple words is just the opposite of a normal housing loan.
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How does Reverse Mortgage Work?
In this scheme, once you pledge your house for the ‘reverse mortgage’, the bank will arrive at the value of the house after carrying out its due diligence. After creating the room for interest costs and price fluctuations, the bank will disburse the balance amount to you depending on the payment option that you choose. With every payment that the bank gives you, your equity in the house decreases. This line of credit is open, typically for 15 years.
Even after the tenures you can continue to stay in your house. Only if you leave the property permanently, or in case of death, the lending institution will sell the property, and from the proceeds it will take the amount that is payable by you to the bank; the balance will be distributed to your legal heirs. The bank will also conduct period valuation of the property, typically after five years, to ensure that the value of the house is more than the total amount payable by you.
As per the Wikipedia Definition, A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves.
What are the features of this loan?
The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India 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.
What happens after the death of one or both of the spouses?
If one of the spouse dies, the other can still continue living in the house. If both die, the bank will give their heirs’ two options; either 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.
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 coming into action. 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.
Which banks provide ‘Reverse Mortgage’ in India?
Some financial institutions that provide the scheme in India are Dewan Housing Finance, State Bank of India, Punjab National Bank, Bank of Baroda, Central Bank of India, Union Bank of India, LIC Housing Finance, Indian Bank, Andhra Bank, Corporation Bank, Canara Bank. Senior citizens are eligible for the scheme.
What are your views about ‘Reverse Mortgage’ Scheme? Have you taken the advantage of this option, and if not, are you planning to do it in future? Please put your valuable inputs in the Comment box below.