1. Reverse Mortgage: What is it?
A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan.
2. How does it work?
In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Installments (EMIs). In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs. The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one in which, the tenure is 15 years and the owner of the house and his/her spouse continue to live in the house till their death -- which can occur later than the tenure of the reverse mortgage. Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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).
8. 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.
9. 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 lakh (Rs 5 million), 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.
10. Can reverse mortgage click for India's elders?
You have spent a lifetime working, providing and saving. You have built a home and brought up your children. They got the best education possible, got their life partners and are now in far-off lands, leading their own lives, nurturing their own dreams, waging their own struggles.As you lean back in your twilight years, you find that life still needs a lot of money, and that you are short of it, despite the savings. There is one consolation though, you have a house of your own. It's a familiar story, but now it will acquire more promise and dignity.
The finance minister introduced the idea of reverse mortgage in this year's Budget. Under it, citizens aged 62 years and above will be able to pledge their house and derive an income -- monthly or a lump sum -- for 15 years while living in it. If you go for the lump sum amount, you can deposit it in a bank, withdraw from your account according to your requiremetns and keep earning interest on the balance. Says Harsh Roongta, director, Apnaloan.com, "A product of this kind was absolutely necessary."
The National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), is preparing the guidelines on reverse mortgage. NHB chairman S. Sridhar says: "We have formulated the draft operational guidelines and circulated them among banks for their comments and suggestions. They are expected to be finalised shortly."Although the finer aspects of reverse mortgage have still not been finalised, some things have been made public (see Onward Bound in Reverse Gear, 17 August 2006).
Loans will be given only to those who have a clear title on their property This rule applies to both stand-alone houses as well as flats. In case of inherited property, all claimants to it will need to give their consent in writing. Sridhar says that if the property is inherited, the lender (banks or HFCs) will be guided by legal advice on the borrower's clear rights or title. Another requirement is that prospective borrowers will be able to pledge their house only if they are using it as their permanent primary residence. Sridhar says it may not be possible to provide reverse mortgage for houses on power of attorney.
As per the present rule, the lender will take possession of the house, sell it and adjust its dues if the borrower dies. It doesn't specify what course would be taken if the children of such borrowers neither have the financial means to reclaim the house nor are willing to vacate it. The NHB says "the children will have to leave within a reasonable time that the bank/HFC takes to effect the sale." To take into account any change in the value of the property during the tenure of the loan, there will be a provision for its revaluation at least once in five years. "The loan quantum may get revised on the basis of such revaluation. The methodology of revaluation and its schedule shall be clearly specified to borrowers upfront," says Sridhar.
Reverse Role: Where You Stand
The guidelines for reverse mortgage are not final yet, but a few aspects have been made public. Here are the answers to some of the questions you may have:
11. I am 58 years old. Do I qualify for a reverse mortgage (RM) loan?
No. As per the current guidelines of NHB, couples/individuals have to be at least 62 years of age to qualify for the loan.
12. I stay in an apartment in a housing society. Can I pledge my house for an RM loan?
Yes, provided the property title is clear. The transaction agreements are being worked out for houses that are on power of attorney.
13. I stay with my son in Mumbai. Can I pledge my Delhi house and avail the loan?
No, because borrowers must be using the residential property for which they are seeking mortgage as permanent primary residence.
14. Will I get a fixed EMI for 15 years?
The NHB is likely to mandate a revaluation of the property at least once in five years. The quantum of loan may get revised as a result of such revaluations. This means that the EMI will be flexible.
15. What will happen if the liability (principal + interest) exceeds the value of the property during the term of plan?
The lender will have recourse only to the property and will need to face the risk.