Is Reverse mortgage beneficial in India?
They have the highest form of respect in our country.
However, they also have the highest costs for medical treatment.
Let’s think of some senior citizens, who suffer of a lack of regular income or financial support from their children, which has shamefully put them into a financial crunch, at this age which is meant for retirement. Further due to the ongoing and ushering western and nuclear family culture, gone are the days when the elderly lived with their sons and daughters, depending on them for all of their amenities, financial or medical.
Thus was the reverse mortgage system introduced by the Union Government in 2007 in India.
It is a good answer to such issues faced by senior citizens, giving them a life of dignity and pride and respect, without their children or family’s support.
Let’s take the example of Mr.Kheria, a central government retiree, who has been living with his wife in an independent home for the last 35 years. He has two sons, both settled in New York, and they, have no intention of moving base to their native land in India. The couple, both of sextet ages, do not wish to live with their sons in the U.S.
Mr.Kheria is a heart patient and his wife is diabetic, and thus they have to incur and spend a substantial monthly expenditure as their medical bills.Not satisfied with his pension, but also not wanting to depend on his sons for meager household expenditures along with his medical care, he approached his trusted bank for a solution. And what did the trustworthy bank / banking institution advise him to do? The bank advised him to opt for Reverse Mortgage so as to ease his monthly expenditures.
What is this concept of reverse mortgage, now?
In layman’s words, a reverse mortgage would be clarified as to be the “opposite” of a conventional home loan.
A reverse mortgage is to enables senior citizen to receive a regular stream of income from a bank/banking institution against the mortgage of his home. The borrower though continues to reside in the property till the end of his life and receives a periodic payment on it.
How does such a concept of a reverse mortgage actually work?
When the home is pledged, its monetary value is concluded by the bank, depending upon factors such as , the demand for the property, current property prices, and the condition of the house.
The bank, then disburses a loan amount to the borrower in the form of periodic payments, after considering a margin for interest costs and price fluctuations. The periodic payments for reverse mortgages, are also and very well and commonly known as reverse EMI . These are received by the borrower over fixed loan tenure. With each payment, whether monthly or quarterly, the equity or the individual’s interest in the house decreases.
A reverse mortgage, is a very ideal option to opt for, for senior citizens who require regular income; or if the property is of illiquid nature.
The Reserve Bank of India has these mandatory guidelines to follow for a reverse mortgage:-
· The Maximum loan amount should be around and up to 60% of the total value of the residential property.
· Maximum tenure of the mortgage is 15 years while the minimum is 10 years. Some banks are now also offering a maximum tenure of 20 years!
· There are options of a monthly, quarterly, annual or lump sum loan payment scheme.
· Property revaluation is to be done by the lender/ bank / banking institution once, every 5 years.
· If at such an incidence, the valuation has increased, borrowers have the option of increasing the quantum of the loan. In such a case, they are given the incremental amount in lump-sum.
· Amount received through reverse mortgage is a loan and not an 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.
· Reverse mortgage interest rates could be either fixed or floating. The rate will be determined by the prevailing market interest rates.
Now, what are the various eligibility criterion for reverse mortgage?
· The loan taker, and the house owners have to be above the age of 60 . If the spouse is also a co-applicant, then she should be above 58 years.
· The loan takers should be owners of a self-acquired, self-occupied residential house or flat, in India. The titles should be clear, indicating the loan takers ownership of the property they are to pledge.
· The pledged house has to be free from any encumbrances.
· The life of the property should be at least, a minimum of 20 years.
· The pledged house should be the permanent and primary residence of the borrowers.
And how is a reverse mortgage settled?
§ A reverse mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. The bank first gives an option to the next of the kin in line, to settle the loan along with accumulated interest, without sale of property. If the next of the family kin is unable to settle the loan, the bank then opts to recover the same from the sale of the property.
§ Any extra amount, after settlement of the loan with accrued interest and expenses, through the sale of the property, will be passed on to the legal heirs. If the sale proceeds are lower than the accrued principal plus interest amount, the loss is borne by the bank. This loss can happen in cases such as where the banks original estimation is not in line with the real estate market movement.
Let’s note some other points of a Reverse Mortgage Loan.
1) The prepayment of the loan:-
Borrowers can pre-pay the loan at any time during the tenure of the loan, at no prepayment penalty or charges.
2) Outliving the tenure of the loan:
If the borrower outlives the tenure of the loan, they could continue to stay in the house. The lending institution can, however cease the monthly payments. Settlement of the loan is done only after the borrower’s death.
3) 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, does settlement of the loan take place.
This loan, however can be foreclosed by the lender in the consequences of these:-
· If the borrower has not stayed in the house for a continuous period of one year.
· If the borrower has not paid property taxes and fails to insure the home
· If the borrower readily declares himself as “bankrupt”.
· If the mortgaged property is donated or abandoned by the borrower.
· In the case 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, in addition of a new owner to the house’s title, or also, creating further encumbrance on the said property.
· If the government under statutory provisions, seeks to acquire or condemn the residential property for health or safety or public reasons.
we concluded that:-
Reverse Mortgage is quite a new concept in India. It will, naturally, take some time for this concept to change the mindsets of individuals to in order to accept it. As a financial tool, Reverse Mortgage is ideal to augment a senior citizen’s income in his years ahead. In spite of all its shortcomings in India, it could better and help the shortfall in one’s pension or income in order for them to live a quality and dignified life , years ahead.
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