Monday, August 20, 2012

Reverse Mortgage in India

The reverse mortgage scheme offered by some of  the leading banks in India could bring the required answers to the suffering senior citizens who are without proper financial support . 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.

 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.The reverse mortgage scheme offered by some of  the leading banks in India could bring the required answers to the suffering senior citizens.

What is Reverse Mortgage Scheme?

Reverse Mortgage is a product which is like a ray of hope for some senior citizens who don’t have access to any regular income. The concept of Reverse Mortgage is simple, a senior citizen who owns a house but has no regular source of income can mortgage his property with a bank or housing finance company (HFC) and in return they will pay the individual a regular payment.

What are the features of this loan?
The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India  have the following features:

  • Any house owner over 60 years of age is eligible for a reverse mortgage.
  • The maximum loan is up to 60 per cent of the value of the residential property.
  • The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).
  • The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
  • The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
  • The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
  • Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

How is the loan paid?
With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.
In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.
When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.
The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.
What happens after the death of one or both of the spouses?
If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.
How much of an annuity income can my house generate using reverse mortgage?
The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12 per cent to 14 per cent.
What is a loan to value ratio?
Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent.
So, for e.g., if you pledge a property worth Rs 60 lakh (Rs 6 million), then the loan amount that you can get is Rs 36 lakh (Rs 3.6 million).
Does a person's age affect the amount of annuity paid?
It certainly does. Higher the age, higher the annuity! Everything else remains the same.

Why is this scheme not popular?
Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps because better awareness had not been created about the product.
Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakhs  instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years.
The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.
(Source :

Though there are certain advantages reverse mortgage loans to Senior citizens there are certain disadvantages also. 

*Disadvantages of a reverse mortgage loan:
  • Although reverse mortgage loan can act as a source of survival during old age it can always be called a last resort. It has few demerits which have to be noted before planning for a reverse mortgage loan.
  • Pledge the property to loan lender means officially giving loan provider the right to sell the house to recover the loan. If the owner of a house is willing to transfer the ownership to someone after his/her death then this loan is not to be considered as a source of income.
  • High rate of interest compared to other loans.
  • Variation in interest rates and loan amount during the time of valuation can turn into serious problems at times. 
The terms and conditions of the reverse mortgage loan are to be studied and taken care of before purchasing it. Everything from factors related to title of property, valuation of property, lending limits should be considered before choosing a particular mortgage loan.

The details of Reverse Mortgage Loans offered by different banks are given in the following links:
Links for details of Reverse Mortgage in different  Banks/Institutions