72-year-old Asit Sen and his wife, 68, live in a house he owns in Manicktala. Thatâ€™s the only asset the couple has. A former employee of the local post office, Mr. Sen lives off his meagre pension but with his wifeâ€™s illness, things are getting difficult to manage. Their son, who lives in Australia barely provides any financial support. With seemingly no other option, Mr. Sen considers his relatives as his last resort but with every passing day, this hope is diminishing as well. Now, the couple lives each day with a fear of what tomorrow may hold for them.
The couple is clearly suffering from the distress of financial crisis that old age often brings along. But they donâ€™t have to â€” if they are aware of and avail the facilities of the reverse mortgage.
What Is Reverse Mortgage and How Can it Help?
A reverse mortgage, to start with, is specifically designed for asset-rich-but-cash-poor senior citizens. The loan is a life saver, particularly for those elderly people who have retired from work, lack regular source of income, or the financial support from their children.
The union government, to ensure the dignity of senior citizens who have served the nation for years, introduced the reverse mortgage scheme in the year 2007. The scheme is a “golden walking stick” for aged couples.
Put simply, a reverse mortgage is just the opposite of a traditional home loan. Under the reverse mortgage, the lender, usually a bank or a financial institution, pays a contracted amount to the borrower, unlike a loan, where the borrower pays instalments to the lender.
The facility enables elderly people to get a regular flow of income against the mortgage of a home they own. The borrower, in this case, the one pledging the asset, continues to reside in the property, and at the same time, enjoys the benefit of a periodic payout from the bank until the end of life.
The General Guidelines for Reverse Mortgage
The Reserve Bank of India has framed the following guidelines for reverse mortgage –
- The maximum loan amount would be up to 60% of the value of the residential property.
- Minimum tenure of the mortgage is 10 years, and the maximum is 15 years. Though, in recent times, some financial institutions are also offering a maximum tenure of 20 years.
- Options available for monthly, quarterly, annual, or lump sum payment of the loan.
- In situations, where the property valuation has appreciated, the borrower is eligible to increase the quantum of the loan, and in such cases, the increased amount is provided in lump-sum.
- The reverse mortgage is tax-free, as it is a loan and not an income.
- The interest rates in a reverse mortgage could be either fixed or floating. The rate is determined by the prevailing market conditions.
Eligibility Criteria for Reverse Mortgage
- House owners above the age of 60 years can avail the reverse mortgage scheme. In case of female applicants, she should be above 58 years.
- The residential property must be self-acquired, self-occupied by the borrower within India.
- The mortgaged property should be the primary and permanent residence of the borrower.
- All documents related to the asset should be clear, indicating the borrower’s sole ownership of the property.
- The property should be free from any loans.
Settlement of Reverse Mortgage
A reverse mortgage loan is due when the last surviving borrower dies, or if the borrower chooses to sell the property. In case of death, banks usually give an option to the next kin of the deceased to settle the loan along with accumulated interest. If the legal heir is unable to settle the loan amount, the bank opts to recover it from the sale proceeds of the property.
Any extra amount received from the sale after deducting the principle, the accrued interest, and expenses, is passed on to the legal heir. If the sale proceeds are lower than the loan amount, the loss is absorbed by the bank.
Why Doesn’t Reverse Mortgage Hold Much Traction in India?
The reverse mortgage is perhaps the most inadequately marketed banking product. This, primarily dampens the popularity of the scheme. Though launched in 2007, several reports suggest that many senior citizens are not even aware of it.
Moreover, reverse mortgage involves a lengthy and complicated documentation process. This can be time-consuming and extremely tedious for aged people. In addition, the monthly payout released to the borrower is fixed. The agreement doesn’t cover the provision to increase the monthly payout, neither does it take into account the inflation factor.
Despite its shortcomings, the reverse mortgage is an excellent financial tool that can augment the income and make up for one’s financial shortfalls. However, in India, since we have an emotional attachment with our homes, it might take some time for the relatively new concept to fit into the Indian mindset and make some real impact in the market.