Reverse mortgage in India is slowly but surely becoming an acceptable means for the elderly to lead a dignified life through income from the home that they once built while they were earning.
Mr. Menon has been retired for almost a decade now and has been living a peaceful life with his wife. However with the rising cost of living and extra expenses of health care , he finds it difficult to survive on his meager pension alone. Having been an upright and sincere government servant throughout his life his only asset today is the house he built from the employee soft loan almost 2 decades back.
His self esteem forbids him to ask money from children who are settled abroad. Reverse mortgage is an option that Mr. Menon was completely unaware of till recently. He can now opt for using his home to create financial security for himself and his wife without sacrificing his pride. This relatively lesser known concept of reverse mortgage in India is rapidly gaining acceptance in our society.
What is a Reverse Mortgage in Simple Terms ?
Reverse mortgage loan in India works just opposite of the conventional home loan. Here the owner offers the bank his house in lieu of money, where the bank does a valuation based on real condition of the house and the market prices. The bank then pays the owner the decided amount in installments as agreed upon providing a regular source of income till the time of death of the owner or the spouse after which the bank takes over the rights to the house.
How does Reverse Mortgage Work – RBI Rules ?
Reserve Bank of India is conservative while setting the norms for such transactions.
- The total amount of money that bank shall pay to the owner in such an arrangement shall not exceed 60-90% of the prevailing market value of the house at the time of pledging it. Reverse mortgage loan formula is nothing but 60-90% market value of the home will be given as loan.
- Borrower has the option of taking payment in monthly, quarterly or yearly mode but the maximum payment cannot exceed Rs. 50,000 per month
- The borrower also has an option of taking lump sum payment which is 50% of the eligible amount but cannot exceed more than Rs. 15,00,000. The option is available only once for the purpose of any medical emergency for the borrower, his/her spouse or any dependent.
- The total period of payment by the bank taking the mortgage shall not exceed 15 years. But some banks are actually giving for a longer period.
- Banks need to reassess the prevailing value of the property every 5 years to find out the financial viability of the mortgage.
- The banks are at liberty to introduce a fixed or floating interest rate as per the convenience of the owner who mortgages the property.
Reverse Mortgage Eligibility Criteria
How do you qualify for a reverse mortgage?In order to be able to avail this facility the elderly citizen seeking the mortgage must fulfill the following criteria.
- The owner who mortgages such property should be at least 60 years of age and the spouse who becomes a co borrower in this case must be above 58 years.
- The house must be self acquired and self occupied by the borrower at the time of the mortgage.
- The borrower must be the clear owner of the property and the house must be free from all encumbrances.
- The bank must evaluate and determine that the expected life of the house at the time of mortgage is a minimum of 20 years.
How Reverse Mortgage in India is Settled?
Like any other mortgage the Reverse Mortgage settlement in India is also guided by a few laid down stipulations by the RBI.
- The borrower may sell the property to settle the outstanding amount due to the bank in between the stipulated period. Otherwise the repayment can also be done after the death of the borrower by the surviving spouse.
- The bank may even sell off the house to settle the dues after death of the borrower. If the proceeds are more than the amount due then the balance is paid back to the surviving spouse or the legal heirs.
Can you Pay Off a Reverse Mortgage early?
This kind of loan can also be foreclosed provided the following conditions are met.
- The borrower does not stay in the house for more than a year.
- Borrower defaults on tax payments.
- The borrower declares bankruptcy and abandons the place for good.
- If the borrower is renting out the house for income generation.
Reverse Mortgage Loan Example
Suppose Mr. Menon is 65 Years Old and his spouse is 62 Years old. They both are pensioner but the pension amount is not sufficient enough to sustain. Mr. Menon owns a house which is worth Rs. 60 Lacs. The bank is ready to give him the loan amount of Rs. 36 lacs on his house for which they will be paid Rs. 36000 every month for next 15 years. So Mr. Menon can live in the same house for next 15 years and get a monthly income too.
Now there are 2 scenarios
Mr. Menon and his wife live more than 15 Years
If both or either one of the spouse outlive the loan tenure of 15 years, the settlement will be done only after the death of both but the monthly payment ceases after the loan tenure is over.
So in this case if Mr. Menon and his wife lives till the age of 85, though the monthly payment will cease after 15 Years , they can stay in the house till they die.
Mr. Menon and his wife live less than 15 Years
If both the borrowers die before the loan tenure, the next kin is asked to pay the loan. In this case let us say Mr. Menon`s son would be asked to pay in loan. If his son is not able to pay the loan, the house will be sold. If the amount is more than the loan amount, the balance would be given to Mr. Menon`s son. If the balance is less than the loan amount, the loss would be borne by the bank.
List of Banks offering Reverse Mortgage in India
Reverse Mortgage Loan
|Maximum Amount||Maximum Loan Tenor|
|SBI Reverse Mortgage Loan||1 Cr||
HDFC Reverse Mortgage Loan
|No Informaation||No Information|
|ICICI Bank Reverse Mortgage Loan||No information||
Axis Bank Reverse Mortgage Loan
Canara Bank Reverse Mortgage Loan
|50 Lacs for Indendent House
25 Lacs for Flat
IDBI Bank Reverse Mortgage Loan
|Union Bank Reverse Mortgage Loan||1 Cr||
- National Housing Bank (NHB)
- Dewan Housing Finance Limited (DHFL)
- Indian Bank
- Central Bank of India
- LlC Housing Finance
- Andhra Bank
- Corporation Bank
Reverse Mortgage Tax Treatment
This facility is considered as a welfare measure and not a conventional credit facility both by the financial institutions as well as the government. Thus the amount received from the bank by owner in lieu of the reverse mortgage of his home is considered as a loan and not a source of income. Therefore it is exempt from taxation by the income Department and hence it becomes all more beneficial for the senior citizens who like Mr. Menon are earning some pension to get extra income through reverse mortgage without having to pay taxes on the money thus received.
Is Reverse Mortgage a Good Idea?
Reverse Mortgage Disadvantages
Lengthy documentation is the biggest drawback of reverse mortgage loan. It is very difficult for senior citizens to understand the tedious documentation process.
Also the monthly amount is fixed, it cannot be increased.
Senior citizens also have resentment towards reverse mortgage loan as this is their whole life earnings and they have emotional attachment to it.
So this way people like Mr. Menon can continue to live life the way they want. Their self built house looks after the extra expenses, they need, at the late stage in life.
What do you think about reverse mortgage? Do you think reverse mortgage in India will help elderly to lead a dignified life?