Reverse Mortgage Loan

You must be familiar with taking a home loan, but do you know that banks also offer reverse loans against your home. This is called mortgage. For example, on taking a home loan, the bank keeps all the documents with it and gives you a lump sum amount, then you repay this amount in instalments. Reverse mortgage is just the opposite. It is seen as the support of old age.

                                                                                                                                                        Subas Tiwari

In reverse mortgage loan, the bank gives you money every month by mortgaging your house. How much money will be received depends on the cost of the house. The bank gives reverse mortgage up to 60% on the cost of the house. When the person taking the reverse mortgage dies, the house becomes the property of the bank.

If you are a senior citizen (or of age above 55 years & nearing the twilight of your service/profession) and staying alone in a house/flat without family members and/or in need of a regular income to meet your expenses of living a decent life, then this is the best available banking product for you.

This product is very popular in the Western Countries where senior citizen couples almost always stay alone in their apartments with no one to look after them & they require regular money for meeting daily living/travel expenses (medical needs met by NHS).

This product is unique in the sense that the formalities of a loan against property are gone through the entire process of documentation, valuation, fixing rate of interest & tenure of a mortgage loan in addition to creating a mortgage (normally Un-Registered Equitable Mortgage-UREM) in lender’s favour. But the disbursements are made to the beneficiary by way of an Annuity which could be either a lump-sum amount and/or paid in regular monthly/quarterly intervals by charging the amount to the loan account.

So, in effect, it is a loan in reverse-the beneficiary gets an EMI for a fixed period in consideration of creating a mortgage in favour of the lender. As long as one lives, there is no repayment of principal amount and interest. A number of banks are sanctioning such loans in India.

Let’s go into the nitty-gritty of this loan cum annuity product to understand more of the salient features & the reasons for such loans not taking off in volume in our country.

Reverse Mortgage Loan Scheme in India

The Government of India (Ministry of Finance-CBDT) had by a Gazette Notification (No.93/2008 dated 30th September, 2008) formulated this Scheme to be implemented by National Housing Bank (through its Housing Finance Companies) and Scheduled Commercial Banks effective from 1st April, 2008 and has given the following definitions.

What is Reverse Mortgage? 

Reverse Mortgage is a mortgage of Capital Asset by an eligible person against a loan obtained by him from an approved lending institution.

What is a Reverse Mortgage Transaction?

A transaction in which the loan may be disbursed to the Reverse Mortgagor but does not include transaction of sale, or disposal, of the property for settlement of the loan.

What is the cap (upper amount) on the Reverse Mortgage Loan?

1. Periodic payments to be decided mutually between the approved lending institution and the reverse mortgagor.
2. Lump-sum payment in one or more trenches, to the extent that the aggregate of the amount disbursed as lump-sum payments does not exceed 50% of the total loan amount sanctioned.

What is the maximum loan period?

The loan under the reverse mortgage shall not be granted for a period exceeding 20 years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.

Why it could be attractive to Senior Citizens?

• Senior citizens, who have a lack of regular income or financial support from children can opt under this scheme easily.

• This loan will make them less dependent on their children for their amenities and medical needs.

• Senior citizens could receive a regular stream of income from a lender (a bank or a financial institution) against the mortgage of his home. The borrower (i.e. the individual pledging the property), continues to reside in the property till the end of his life and receives a periodic payment on it. So this Scheme ensures regular income while permitting stay in their own house.

• A reverse mortgage is an ideal option for senior citizens if the property is of illiquid nature for some reason.

Salient features

• Reverse mortgage is the “opposite” of a conventional home loan in that you get paid instead of payment to be made.

• It doesn’t require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. 

• Here, the borrower doesn’t have to pay principal or interest payments during the loan tenure.

• The amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner.

• 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 borrower’s 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

1. The borrower has not stayed in the house for a continuous period of one year or
2. The borrower has not paid property taxes and fails to insure the home or
3. If the borrower declares himself as bankrupt or
4. If the mortgaged property is donated or abandoned by the borrower.

How the Reverse Mortgage Loan Works

When the owner’s home is mortgaged, its monetary value is arrived at by the bank, on the basis of the condition of the property, legal ownership by means of an advocate’s report as well as the valuation of the property through a report obtained from approved valuers in the lender’s panel as regards market value, circle rate value & distress sale value. The bank then disburses a loan amount to the borrower in the form of periodic payments, after relating to the Annuity Chart prepared by the bank for such loans. The periodic payments are also known as reverse EMI or Annuity Payments which are received by the borrower over fixed loan tenure.

Tax Benefits

• The lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.
• 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.

Limitations/Disadvantages

• The reverse mortgage loans are not available for commercial property. Thus, this requirement limits bank lending.
• Inherited property will also not be eligible under this scheme. Indians treat owned property as an important family asset to be inherited by the next generation. So this could be a dampener.
• Seniors who own real estate are typically guaranteed care and support during their golden years. So, the younger generation dissuades their elders from obtaining such loans in their twilight years.
• This loan is available only to house owners above the age of 60. If spouse is a co-applicant, then she should be above 58 years. This again restricts bank lending & many are deprived from availing such loans.
• Property should be the permanent primary residence of the individuals. So this prevents senior citizens who do not possess property in their name.
• 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 borrower’s death. So in effect, the loan is in a dormant state.
• Another point to note is that in reverse mortgage, the loan amount is capped, so it is less lucrative for the borrower.
• There is no lifetime income which most retirees search for in any fixed income avenue. Payment beyond 20 years cannot be made by the lender.
• The liability of repaying the loan arises as the term gets over. So, if someone lives the term, one runs a risk of losing the house if one is not able to repay the loan.
• 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 house’s title or creating further encumbrance on the property.
• It is surprising that private commercial banks have not come forward to lend under this scheme. This could be perhaps due to long gestation period for recovery & is primarily linked to the death of the beneficiary for loan recovery.

Some of the Terminologies Explained

MARGIN- This is not the ‘margin’ you normally associate with a bank loan product, where you provide your stake capital or risk capital for the loan. Here, margin component is meant to convey that a certain portion of the value of the property arrived at would be deducted towards margin & the loan will be based on the value of the property thus arrived.

INTEREST RE-SET- In this system, the interest rate is initially offered for a limited number of years governing the loan. Thereafter, the interest rate is re-fixed or re-set (mostly, it would be a marginal rise in ROI) for another fixed period of the loan tenure. This would be decided by the bank after giving option for the borrower to agree to interest re-set or close the loan.