Guidelines of Reverse Mortgage – The Reserve Bank of India has formulated the following guidelines for a Reverse Mortgage.
-Maximum loan amount would be up to 60 percent of the value of the residential property.
-Maximum tenure of the mortgage is 15 years and minimum is 10 years. Some banks are now also offering a maximum tenure of 20 years.
-Option of monthly, quarterly, annual or lump sum loan payment.
-Property revaluation to be undertaken by the lender once every 5 years.
If at such time, the valuation has increased, borrowers have the option of increasing the quantum of the loan. In such a case, they are given the incremental amount in lump-sum.
-Amount received through reverse mortgage is a loan and not income. Hence it will not attract any tax. However, a borrower is liable to capital gains tax, at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
-Reverse mortgage interest rates could be either fixed or floating. The rate would be determined by the prevailing market interest rates.
Eligibility Criteria for Reverse Mortgage
-House owners above the age of 60 years. If spouse is a co-applicant, then she should be above 58 years.
-Owners of a self-acquired, self occupied residential house or flat, located in India. The titles should be clear, indicating the prospective borrowers ownership of the property.
-Property should be free from any encumbrances.
-The life of the property should be of minimum 20 years.
-Property should be the permanent primary residence of the individuals.
Settlement of a Reverse Mortgage
A Reverse Mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property.
Any extra amount, after settlement of the loan with accrued interest and expenses, through the sale of the property, will be passed on to the legal heirs. If the sale proceeds are lower than the accrued principal plus interest amount, the loss is borne by the bank. This loss could happen in cases where the banks original estimation is not in line with the real estate market movement.
Other Highlights of Reverse Mortgage
-Prepayment of Loan: Borrowers could prepay the loan at any time during the tenor of the loan, at no prepayment penalty or charges.
-Outliving the tenure of the loan: If the borrower outlives the tenure of the loan, he could continue to stay in the house. The lending institution may however cease the monthly payments. Settlement of the loan is done only after the borrowers death.
-Death of one of the spouses: If one of the spouses dies, the other can still continue living in the house. Only on death of both, settlement of the loan takes place.
-Foreclosure: The loan could 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 fails to insure the home
-If the borrower declares himself as bankrupt.
-If the mortgaged property is donated or abandoned by the borrower.
-If the borrower makes changes in the residential property, that could affect the security of the loan for the lender. This could be renting out part or entire house, addition of a new owner to the houses title or creating further encumbrance on the property.
-If the government under statutory provisions, seeks to acquire or condemn the residential property for health or safety reasons.
Drawbacks of Reverse Mortgage
-Lengthy documentation procedures: Banks require various documents of the property. For a senior citizen this procedure could be tedious, complicated and difficult to understand.
-Fixed monthly amounts: The monthly payouts are fixed. There is no provision to increase this amount in case of an emergency or contingency.
Popularity of the Scheme in India
Though introduced in 2007, Reverse Mortgage has not gained much popularity in India for the following reasons.
-Inadequate marketing of the product. Recent reports indicate that many of the senior citizens are not aware of the existence of such a product.
-Many banks which offer Reverse Mortgage have capped the maximum loan amount available for individuals to a maximum amount of Rs 50 lakhs to 1 crore.
-Children have resentment for a reverse mortgage as they see it as giving away their family home or legacy.
Reverse Mortgage is a relatively new concept in India. It would take some time for a change in mind set of individuals to accept it. As a financial tool, Reverse Mortgage is ideal to augment a senior citizens income in his years ahead. Despite all its shortcomings in India, it could make good the shortfall in ones pension or income to live a quality life ahead.
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