“Have you heard of a reverse mortgage loan?” asked Moonmoon’s father.
“Never,” said Moonmoon.
“It can solve the financial problems of senior citizens’” said her father.
“Tell me more about it,” said Moonmoon.
“Sure. Come to our home next Sunday. I will tell you all about it. Your mother will also be delighted to see you two.”
They all agreed and Moonmoon and Raj came to her parents’ home.
A reverse mortgage loan is especially suited for senior citizens with their own homes but without much income. It provides a regular flow of income against the mortgage of a home they own.
Let’s know more about it.
What is a Reverse Mortgage Loan?
A reverse mortgage loan provides an additional source of income for senior citizens of India, who have a self-acquired or self-occupied home in India.
The maximum loan amount is Rs 1 crore.
This product is beneficial for senior citizens who do not have adequate income to support themselves. The bank makes payments to the borrower/borrowers (in the case of a living spouse), against the mortgage of his/their residential house property.
The borrower is not expected to service the loan during his lifetime. However, he can opt to repay the loan amount in full and reclaim his property rights.
How Senior Citizens Can Benefit from It
A reverse mortgage loan is just the opposite of a traditional home loan. Under the reverse mortgage, the lender, usually a bank or a financial institution, pays a contracted amount to the borrower, unlike in a loan, where the borrower pays installments to the lender.
The borrower, in this case, the one pledging the asset, continues to reside in the property, and at the same time, enjoys the benefit of a periodic payout from the bank.
In the current period of high inflation and low bank interest on term deposits, it is often difficult to make ends meet for senior citizens who are dependent on interest income only. In such a situation, a reverse mortgage loan can help.
A reverse mortgage loan does not create an immediate liability on the borrowers and therefore there is no pressure for repayment even after the loan tenure ends. Lenders initiate loan recovery only when the borrowers permanently stop living in the property, decide to sell it, or on the borrowers’ death.
Upon the death of the borrowers, their heirs can opt to repay the loan and claim ownership of the property. They may profit from the transaction if the property value rises over time and outweigh the loan amount.
How Reverse Mortgage Loans Work in India
We will now see how this works. Let’s understand it with an example.
Let’s imagine you have got a property that you want to use as collateral for a reverse mortgage loan.
You should approach a bank or financial institution which will send a valuator to estimate the property value.
Suppose the value arrived at is Rs 1 crore. Most banks offer a maximum of 80% of this amount i. e. Rs 80 lakh under the reverse mortgage loan scheme.
However, unlike a loan against property, the entire amount is not paid in one go. The amount sanctioned as a reverse mortgage loan is divided into monthly installments and will be paid out to you over the tenure of the loan. Most banks allow a tenure of 10-20 years.
The bank charges you interest on the amount that is paid out to you every month. So, as the total amount paid out to you increases over time, the total interest payable on the reverse mortgage loan will increase as the loan progresses. The interest on the loan is deducted from the total loan amount sanctioned by the bank to arrive at the monthly payout amount.
Now, at the end of the loan tenure, the payouts made to you by the bank will stop, but you do not need to repay the loan. Moreover, you can continue to stay on the residential property.
What are the Eligibility Criteria?
Although individual banks/financial institutions have their own criteria to sanction reverse mortgage loans, some of the eligibility requirements are common.
- A reverse mortgage loan is available to anybody over the age of 60. In case a couple wishes to opt for one, the age of the spouse should be more than 58 years.
- The borrower must have a fully owned house used as the primary residence. The property must be free from any legal claims, liabilities, or encumbrances. In the case of a couple, at least one of them must own a house.
- The property must have a residual life of not less than 20 years.
- Properties that are let out or being used for commercial uses are not eligible.
What Documents are Needed?
For availing of a reverse mortgage loan, the following documents are required. However, the lender may ask for additional documents as required.
- Proof of identity such as AADHAAR, voter ID, PAN, passport, etc.
- Proof of address such as voter ID, AADHAAR, passport, utility bill, etc.
- Proof of property ownership and residence like title deeds, property tax receipts, utility bills, etc.
- Passport size photographs
- Bank account statements for the last six months
- Loan account statement for the last one year, if any
Tax Benefits
The major benefit of the reverse mortgage loan is that the income received by the borrower does not attract any tax.
In the event that the house is renewed or repaired with this money, the amount spent on the renewal or repair will be eligible for deduction in the computation of income.
Repayment of the loan will not be considered deductible.
The Disadvantages
There are some significant drawbacks to reverse mortgage loan schemes.
- The monthly amount is fixed, and there is no provision to increase it to cover rising inflation.
- A margin of 15-20 per cent is to be paid on property valuation. So, if the property value is Rs 1 crore, you will receive Rs 80 lakh as a loan. But there is a catch. Since there is loan repayment, the interest component is also included in the loan amount.
Let’s see how this works.
On a loan of Rs 80 lakh, considering a rate of interest of Rs 8.5 per cent over a 20-year tenure, the interest component will come to Rs 45 lakh, and you will receive only Rs 35 lakh as a payout. Also, this will be given as a monthly payout. If you choose to withdraw it as a lump sum, the payout will be 50 per cent of the loan amount or Rs 15 lakh, whichever is higher, and that too is subject to a medical emergency of self or spouse.
- After the borrower’s demise, the property will be sold, and if the valuation is higher than the loan amount, the balance will be returned to the legal heirs. Any complication on inheritance can create difficulties.
- Prior permission from the lender is needed for any changes/extensions/renovation to the property.
Should You Go for It?
In spite of the above-mentioned downsides, a reverse mortgage loan has distinct benefits. Poor awareness is one of the reasons why this scheme is not as popular as it should have been.
However, if we consider the following benefits, it is worth having a serious look.
- It substantially improves your immediate finances
- There is no bar on how you will use the money
- There is hardly any default risk if you continue to pay taxes and insurance
India does not have a social security net, especially for senior citizens, as is present in most developed countries. Apart from pensioners who receive a regular income, there is a vast majority with their own homes but very little cash flow to take care of the increasing cost of living. Mostly, they are dependent on the interest income from bank fixed deposits. Skyrocketing medical expenses amid decreasing bank interest income are pushing them to uncertainties.
In such a scenario, a reverse mortgage loan can be a boon to such senior citizens.
