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About Reverse Mortgage Loan

This is a loan available only to Senior Citizens of age 60 and above who own a residential or commercial property. Senior citizens can avail this loan to meet any financial requirement by mortgaging the property they purchased with their own funds. It lets them to utilize the equity they hold on the property without selling it. The loan can be availed either as a lump sum disbursement or a monthly pay out or a line of credit. It enables them to meet their day to day expenses pertaining to food, medicines and other petty expenses.

Reverse Mortgage Loans
Reverse Mortgage Loans

Why should one go for a Reverse Mortgage Loan?

In India, retirement planning is still in primitive stages. People largely depend on Provident Fund returns for their post-retirement expenses. However, most Indians invest in real estate during their prime earning years. This real estate should be beneficial in some way during the retirement years. A Reverse Mortgage loan gives that benefit to you. It allows you to mortgage your property to avail a loan to meet your expenses without selling it. It also does not require a monthly payment term similar to a home loan or any other loan. The loan amount, along with the interest, becomes due only when the borrower dies, decides to permanently move out of the property or wants to sell the house.

A reverse mortgage loan provides some much-needed liquidity to the borrower who has very little or no income from any other sources. It enables the senior citizen to live with dignity during his/her retirement years while still retaining the title to his/her property. It can come in handy for emergency medical expenses.

How Reverse Mortgage Loan Works

Reverse mortgage loan was introduced in India in 2007. The home owner approaches a bank and expresses his wish to mortgage his house. The bank then conducts a thorough inspection of the house to evaluate its current market value. Then the loan amount is arrived at and the borrower agrees to receive the loan amount as a lump sum, monthly pay out or a line of credit with the bank.

The home owner continues to stay in the house until the time he decides to sell the house, permanently move out or the home owner dies. The borrower can choose to make repayment during the tenure of the loan or not. However, the loan amount, with accrued interest becomes due upon the occurrence of any of the above conditions. The borrower or his heirs could either repay the loan amount and retain the title of the house or the bank will auction the house and realize the loan amount. In case the sale amount is higher than the loan amount, the difference amount is handed over to the heirs.

Few things to remember while applying for a Reverse Mortgage loan

  • This loan is available only for Indian citizens above the age of 60. In case of joint application, the other applicant should be older than 55 years.
  • The property should have clear title free from any encumbrances.
  • The property should be a self-purchased one. Inherited properties are not eligible for this loan.
  • The property should be self-occupied and should be the primary residence of the borrower.
  • The residual age of the property should be a minimum of 20 years.
  • The borrower should ensure regular and timely property tax and other regulatory charges on the property.
  • The property needs to be insured and the premium amount to be borne by the borrower.
  • The borrower agrees to maintain and protect the property from damages.

Tenure of the loan – The prevailing tenure on this loan is between 10-15 years. However, based on the bank’s discretion, it can be extended up to 20 years

Quantum of loan – Banks offer 50 – 80 % of the value of the property. You can avail a loan amount of Rs. 5 Lakh up to Rs. 2 crores.

Maximum monthly payment – As per NHB (National Housing Bank) guidelines, the maximum monthly pay-out cannot exceed Rs. 50000.

Maximum lumpsum pay out – The maximum lump sum payment is restricted to 50% of the total loan amount, subject to a cap of Rs.15 lakh that can be used only for medical expenses of self/spouse. The rest of the amount does not have any spending restrictions.

Rate of Interest – Reverse Mortgage loans are usually offered at a fixed interest rate. The prevailing interest rate ranges between 10.30% - 12.50%. The interest rate might be revised every 5 years after re-valuation of the property.

Disbursement – The loan can be disbursed as per the borrower’s needs. It can provide monthly pay outs or other regular pay out options. You can have a lump sum payment, a dedicated line of credit or a combination of all three.

Reverse Mortgage Loan enabled Annuity (RMLeA)

Reverse Mortgage loan enabled Annuity is an upgraded feature of the loan. It was formulated by NHB to enhance the benefits of a Reverse Mortgage loan to senior citizens. Under this scheme, the lending institution buys an Annuity plan for the loan amount, with a life insurance company, to provide regular income to the borrower for lifetime. This monthly pay out is called annuity and is generally higher than the monthly pay out offered through the regular Reverse Mortgage loan.

Currently, NHB has collaborated with Star Union Daichi Life Insurance Company Ltd (SUD Life), Central Bank of India and Union Bank of India to roll-out this scheme.

The maximum Loan to Value (LTV) ratio depends on the age of the borrower. Though discretion of the bank could make it up to 90% of the property value.

The property needs to be re-valued by the lender periodically and based on such re-valuations, the quantum of the loan may undergo revision. It is the responsibility of the borrower to maintain the property in good condition.

Taxation

All payments under the Reverse Mortgage loan are exempt from income tax under Sec 10(43) of the Income Tax Act 1961. However, the periodic annuity payments are subject to Income tax under Sec 17, 56 and 80CCC of the Income tax Act and taxable at the hands of the annuity recipient

Right for Rescission

To keep up with International best practices and as an extension of goodwill to the customer, after the loan transaction has been finalized, the borrowers may be given up to 3 days to cancel the loan application. This is called the Right of Rescission. Any pay outs that might have been made needs to be refunded by the borrower. Waiver of interest for those 3 days is under the discretion of the banker.

Conclusion

Reverse Mortgage Loan is a convenient way of obtaining liquidity for senior citizens with no other source of income. They can fulfil their financial needs, while still retaining the ownership of the property. This loan is advantageous in times of huge emergency medical expenses. However, the onus of maintaining the property lies with the borrower. They have to make sure that the property tax and insurance premiums are paid and no big damage befalls the property. Failure to comply with these loan terms may result in foreclosure of the loan and forfeiture of the property by the borrower. One should thoroughly understand the terms and conditions laid out by the lender before proceeding with this loan.

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