All About Reverse Mortgage Scheme

The way a reverse mortgage loan works is that it allows an elderly person who is the owner of the house to convert his house equity into loan in the form of cash part by part. The article explains how it works and its benefits

In India, one of the prime apprehensions for people approaching old age is financial support. This worry gets intensified with the increase in cost of living due to rising inflation. Inflation inevitably reduces the purchasing power of consumers, and inflation is the one of the greatest factors that leads to real income erosion. Inflation affects basic necessities such as cost of living, healthcare, etc. Combining this with irregular income and shrinking capacity to work can easily create anxiety for someone who is getting old. So, how can you get a regular income during your golden years? A constant inflow of income without work seems to be an ideal solution to avoid this potential problem.

Is this possible? Indeed, yes! One of the solutions is the Reverse Mortgage Scheme. This was initially perceived as an option to assist people approaching old age. This scheme is offered by several leading banks in India for senior citizens. A reverse mortgage loan can be seen as an anti-home loan i.e. reverse of home loan. In regular home loan, you borrow funds to buy a house and repay the lender on a monthly basis i.e. EMI. As the name suggests in the case of a reverse mortgage, the lender becomes the borrower. The owner of the property i.e. you can continue to make use of the property without any change.

The way a reverse mortgage loan works is that it allows an elderly person (borrower) who is the owner of the house to convert his house equity into loan in the form of cash part by part i.e. senior citizens or elderly persons can use their self-occupied residential property as collateral so that they can receive a monthly income over a specific period of time. The borrower or elderly person can continue to stay in his or her house until death, sale of the house property or until he or she moves out permanently.

Differentiating between Mortgage and Reverse Mortgage

In a normal housing loan, the property being purchased is mortgaged to the lender and the borrower avails a loan in which his stake in the property remains low. As regular EMI is paid on due dates, the loan amount reduces and his stake in the property increases. Nevertheless, in reverse mortgage, the position is exactly the opposite. Here, the borrower initially retains a high stake in the property and receives a regular cash flow. Over a period of time, when the loan amount increases, his stake in the property reduces.

Features of Reverse Mortgage Scheme

1. Eligibility for Reverse Mortgage Loan: Any senior citizen over 60 years of age is eligible for a reverse mortgage loan. Married couples are eligible as joint borrowers for financial assistance subject to the condition that one of them is above 60 years and the spouse’s age should be more than 58 years. An eligible person can take a reverse mortgage loan against his own and self-occupied residential property. He or she can continue to occupy the house.
2. Clear Title of Property: The property against which you are taking a reverse mortgage loan should have clear title and should be free from any kind of encumbrances. The residual life of the property should be more than 20 years.
3. Residential Property: A reverse mortgage loan is not available against the security of commercial property; the concept of reverse mortgage loan is applicable to residential properties only. This is applicable to self-occupied properties by the borrower, where he or she resides currently, that is the permanent primary residence.
4. Liquidity and Cash Flow: This loan essentially provides a good amount of cash flow and since senior citizens are the ones benefited with cash availability, it is a huge relief from them. 5. Valuation of Residential Property: Valuation would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once every five years.
6. Mode of Payment: The loan can be provided through monthly, quarterly, half-yearly or annual disbursements or a lump sum or as a committed line of credit from the financial institution or bank.
7. Utilisation of Loan Amount: The loan amount may be used by the senior citizen borrower for varied purposes including up-gradation or renovation of residential property, medical exigencies, etc. However, the use of reverse mortgage loan for speculative, trading and business purposes is not permissible.
8. Death of Borrower: On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest through sale of the house property.
9. Property after the death of borrower: If in case borrower dies during the loan tenure then bank give two options to the heirs such that they can either choose to pay the outstanding amount, along with interest component to redeem property or the bank will sell off the property to recover its dues and surplus money from sell will be passed on to heirs.
10. Tax Benefit: All the payments under reverse mortgage loan are exempt from Income Tax under Section 10(43) referred to in clause XVI of Section 47 of the Income Tax Act, 1961 i.e. any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the central government.

Let’s consider an example for better understanding. A retiree of age 65 wants to enter into the reverse mortgage scheme by mortgaging his self-occupied house which is valued at Rs 80 lakhs. An approved lending institution agrees to provide periodic monthly payments under the scheme considering a loan to value ratio of 80 per cent and at a rate of interest of 10 per cent per annum. If the retiree opts for a 12-year term of reverse mortgage, what fixed periodic monthly payments will he receive under the scheme?

As can be seen from the table above, an individual can get additional source of income during his retirement excluding any amount he might have saved for his retirement by opting for a reverse mortgage loan. This amount of Rs 22,960.34 will look on the lower side. However, let us compare it with another alternative of selling the house and taking annuity. If in case the same retiree sells the house for Rs 80 lakhs instead of taking a reverse mortgage loan, he will have to stay on rent. Assuming the rent to be 3 per cent of the property value, the rental cost in the same locality will come to around Rs 20,000 per month along with the assumption that there will be a 10 per cent hike in rental every year by the owner. Now, investing the sum of Rs 80 lakhs in an annuity plan such as SBI Life: Annuity Plus, he is expected to get a monthly annuity of Rs 51,790. So, let’s have look at the comparison of annuity plan and reverse mortgage loan in order see which plan is better:

As can be seen from the table above, if in case a retiree sells the house and stays on rent, he might experience benefit in the initial four years over a reverse mortgage loan. However, a reverse mortgage will be beneficial throughout the period of 12 years. Because of potential hike in rent, we can see that the residual amount decreases over a period of time and hence the retiree will have to pay money from his own pocket at the end of the tenure.

Conclusion

Many retirees still survive on interest income and do not have a steady regular income. Sunset years are very crucial stage in every individual’s life on account of dwindling working capacity along with the fact that the interest income and pension income may not be sufficient to survive in this inflationary world. In such a situation, opting for a reverse mortgage can aid senior citizens enhance their monthly income so that they can maintain their standard of living, pay for the medical care that they might need and safeguard themselves financially to overcome emergencies.