Reverse Mortgage in India

Imagine a situation where you grow old and have managed to buy a house. However, you could not save enough for your retirement. You certainly need money to manage your day to day finances since you are retired and have no fixed source of income or your income is not enough to meet your finances.

Reverse Mortgage is the answer for you. Reverse Mortgage is a type of mortgage available to senior citizens in which a home-owner can borrow money against the value of his/her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan. [1]

How does it work?

Reverse Mortgage in India

Realising the potential benefits of Reverse Mortgage, the Union Budget 2007-08 announced the introduction of 'reverse mortgage' by National Housing Board (NHB). NHB issued the final operational guidelines for reverse mortgage loans (RMLs) on May 31, 2007. Many banks have already introduced RMLs. Some of the features/guidelines of Reverse Mortgage in India as formulated by RBI are:[2]

·         Eligibility:
o    A homeowner who is above 60 years of age is eligible for reverse mortgage loan.
o    The property should be clear from encumbrances and should have clear title of the borrower.
o    Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the lending institution, subject to at least one of them being above 60 years of age.

·         Repayment: No repayment is required as long as the borrower lives, Borrower should pay all taxes (e.g. municipal taxes) relating to the house and maintain the property as his primary residence.

·         Factors behind loan: Generally speaking, the higher the age, higher the value of the home, the more money is available. The amount of loan is based on several factors:
o    Borrower’s age,
o    Value of the property,
o    Current interest rates and
o    The specific plan chosen.

·         Valuation: The valuation of the residential property is done at periodic intervals and it shall be clearly specified to the borrowers upfront. The banks shall have the option to revise the periodic / lump sum amount at such frequency or intervals based on revaluation of property.

·         Possession of the property: the Lender shall take possession of the property (or the loan shall become due and payable) only when the last surviving borrower dies or would like to sell the home, or permanently moves out.

·         Legal Heir: On death of the home owner, the legal heirs have the choice of keeping or selling the house. If they decide to sell the house, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs.

·         Tenure of Loan: As per the scheme formulated by National Housing Bank (NHB), the maximum period of the loan period is 15 years. The residual life of the property should be at least 20 years. Where the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy.

·         Income Tax: For tax purposes it has been clarified that reverse mortgage would not amount to “transfer”, and stream of revenue received by the senior citizen would not be “income”. Consequently, from FY 2008-09, the lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.

Note- Reverse mortgage is a fixed interest discounted product in reverse. It does not take into account the changes in interest rates as yet.

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[1] Reference: www.Investopedia.com

[2] Reference: www.rbi.org.in