In the West the concept of reverse mortgage is as old as 1929. The process has evolved over the years and is very useful to the senior citizens. Almost every financial institution in the West has a reverse mortgage product. The same is yet to get popularity in India. The same was introduced by the Finance Ministry in 2007.
You need to understand the following terms:
1) What is “Reverse Mortgage”?
It is basically a financial product in which the owner of an house property converts their equity in the property into an income channel.
Confused? When you take a loan from a bank, you take the loan amount upfront and then pay by back in instalments. In a “reverse mortgage” you simply pledge the house property to a financial institution and they give you a series of cash flow back for a fixed tenure or a lump sum amount.
2) Who are the involved parties?
The senior citizen who owns the house property & the financial institution (In India it would be a bank or a housing finance company(HFC))
3) How does one repay the lumpsum amount or series of cash flows?
The house property owner not required to repay the loan during his lifetime. On death or leaving the house permanently, the loan along with the accumulated interest is repaid through the sale of the property pledged.
§ If there is a shortfall then the lending institutions bears the loss.
§ In case there is profit, the same is returned to the legal heirs.
4) Closing a reverse mortgage.
If the senior citizen gets a lumpsum amount or other income then he can repay the necessary amount and free the property.
5) In case of death of a spouse:
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 either 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) What is the rate at which the annuity be calculated?
Currently the reverse mortgage market is not developed but it would range between 11 to 14%.
7) What is the impact of such annuity on the Income tax Act in India?
The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any income tax liability.
8) Does age have any impact?
Higher the age of the house property owner, more the annuity. Everything else remains the same.
In India:
The National Housing Board (the facilitator for housing finance in India) is promoting a specific product variant 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.
What are the features of this specific product?
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.
- The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
- Revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
- 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.
Why Reverse mortgage?
The reverse mortgage pros and cons should be measured carefully before subscribing to it. Since, the bulk of the savings for the average Indian are typically locked away in a house or other property at the time of retirement, and in case of requirement it cannot be encashed except by selling the home or moving out. This is where reverse mortgage comes as an answer.
The major reverse mortgage lenders in India or the banks and financial institutions providing reverse mortgage in India include:
- National Housing Bank
- Dewan Housing Finance Limited
- State bank of India
- Dewan Housing Finance Limited
- Punjab National Bank
- Indian Bank
- Central Bank of India
Reverse mortgage is a way of getting the benefits on your home equity by retaining the ownership and without having to make any repayments. This is a good solution for senior citizens for their post retirement needs and maintain financial independence.
In case you have anymore questions please write to me at mrinalmghosh@gmail.com
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