Reverse Mortgage: A new concept in Indian real estate

What is reverse mortgage?

A reverse mortgage is opposite of a home loan and is available to the senior citizens. In home loan or any typical mortgage, one borrows money and then pays it back over a period in the form of Equated Monthly Installments (EMIs). While in reverse mortgage, the owner of the house gets the money from the financier on their home. It is important that the home on which the senior citizens are looking forward to get the reverse mortgage should be in their own name and has no existing loan on their home. In this process, one gets a series of cash flow for a fixed tenure from the bank, this can also be thought of as reverse EMI’s.

All the senior citizens above the age of 62 years can go for the reverse mortgage on their property for tenure of 15 years. After 15 years, the money will stop coming but the owner of the house and their spouse can continue to keep living in the house until their death without paying a single penny as rent.

In case the old couple thinks of moving out of the property or after their death, the home serves as security against the money, the home is supposed to be sold in order to pay back the mortgage.  In some cases, the heirs of the owner have the option of retaining the property by paying back the loan amount.

 

The benefit of Reverse Mortgage:

For the people who have born in 1940’s and 1950’s, they have spent their lifetime saving in buying a home. The value of their property has appreciated but, at this stage of their life, they have no liquidity as all their money is locked up in a non-liquid asset.

According to a survey, an urban male in India lives to the age of 82. In general, the retirement age in India is 58. So, one typically lives 24 years after the retirement. With rising inflation, it becomes difficult to get required funds at this stage of life. Considering this the concept of reverse mortgage has the potential to meet the need of funds of the senior citizens in India.

The draft guidelines of reverse mortgage in India prepared by RBI have the following salient features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60% of the value of 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.
• 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.