Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities compound the problem significantly. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But how is it possible?
That is where Reverse Mortgage Loan comes into picture. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream due to its illiquid nature. The Union Budget 2007-2008 had a great proposal which introduced the ‘Reverse Mortgage’ scheme.
What is Reverse Mortgage Loan?
A reverse mortgage is a loan that enables senior home owners aged above 60 years to convert part of their home equity in to income without having to sell their home, give up their title to it or make monthly mortgage payments. The National Housing Bank, a subsidiary of the RBI, and a facilitator for home loan finance in India has set some guidelines.
Reverse mortgage is a product is fairly new to India. Dewan Housing Finance was the first institution in the country to come up with its reverse mortgage product-Saks ham. Since then, most leading lending institutions have come up with their own reverse mortgage products. Some of these are 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 and Canara Bank.
Things to be kept in mind before taking a Reverse Mortgage Loan:
- The borrower should be the owner of the property with a clear title of the self occupied, self acquired residential property located in India. The residual life of the property should be at least 20 years. He should use the residential property as a permanent primary residence. Reverse mortgage is not available for commercial property.
- The loan amount is based on the market value of the property, age of the borrowers and the prevailing interest rate. The quantum of loan may between 40 per cent of the assessed market value of the property for borrowers in the age group of 60- 65 years and 60% of the assessed market value of the property if the age of the borrower is above 75 years.
- The lender apart from checking the property papers will ensure that the borrower pay all the taxes and charges towards the property up to date and also ensure that the property is maintained in the sale able condition and also check that the property is insured against fire and other perils.
- Both reverse and home equity loan differ in that as with respect to home equity loan the borrower needs to pay through monthly payments, whereas in reverse mortgage he need not pay monthly payments as long as he lives in the house. There are no income qualifications to avail reverse mortgage unlike regular mortgages as borrowers are not needed to pay monthly payments.
- When availing reverse mortgage loan the borrowers should remain independent as reverse mortgage allows them to remain in the house and also retains their ownership. The money they get from reverse mortgage can be utilized for anything they choose say like for meeting day to day expenses or for paying for home improvements or for health care expenses or for repaying any existing debts.
- In a reverse mortgage the borrower can choose to receive the money in one lump sum or by way of monthly/quarterly/bi annual payments.
- As per the present requirement the property in question would be revalued once in five years. The fall in property price would affect the borrower. Every five years, bank may even readjust the loan installments, if it is needed, depending on the market conditions and the loan status.
- If the borrower does not stay for a period of 12 months in his house, or if the borrower fails to keep proper maintenance of the property or if the taxes for the property are not paid then the money may become due and must be paid in full.
- After the time of loan is over, the bank may either, acquire the property and give the remainder to the customer’ heirs or they can pay back and keep the property.
- The reversed mortgaged property can be willed and the legal representative should be willing to take the responsibility of paying the entire loan amount with interest on death of the borrower.
- But if the legal heir or representative does not wish to do so the lender may sell the property mortgaged and recover the loan amount and give the surplus if any to the legal heir.
- The scheme is ideal for some people looking for additional money to support their varied needs at their old age.
- However, there are still some grey areas under Indian context with respect to reverse mortgage and which act as a deterrent for the banks to market the variant very aggressively.
Despite being such a lucrative and beneficial scheme, not many senior citizens have opted for RML in India. The reasons for the model not taking off include emotional attachment with one’s house, real estate price correction, absence of clear guidance against legal complications and inadequate marketing by the PLIs.
With the increasing need of post retirement liquid compensation in India, RML can be viewed as a potential alternative as the scheme is beneficial to both the borrowers and lender simultaneously. It is being projected that, RML is expected to gain popularity with the changing mindset of Indian citizens and increasing need of cash flows in old age. Needless to say that if
more awareness is actually created about the scheme and more robust marketing of the product undertaken by PLIs , this scheme can ameliorate the rundown condition of elderly people in India.