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In order to help senior citizens who own a home but do not want to sell them, and yet, supplement their regular cash flow, the government of India has introduced the ‘Reverse Mortgage Scheme, 2008’. It helps the elderly to tap into the value of their residential property while living in the house during their lifetime.
Even though these schemes have largely been a non-starter in India, because of the notions attached to property ownership, there are chances that the concept could gain some steam after the Coronavirus pandemic. In this context, we would discuss the various merits of the reverse mortgage scheme in India, while also looking at the reasons for its the lack of popularity.
Basics of the reverse mortgage scheme
The reverse mortgage is precisely the opposite of the home loan scheme. Under reverse mortgage, the borrower receives money in installments which is paid in full later on. Under reverse mortgage loans, one can avail of the payments in combination of periodical, lump sum or in the form of a committed credit line.
The loan amount is dependent on the value of the house, age of borrower and interest rate agreed upon. The maximum permissible monthly payments under the reverse mortgage loan scheme, is capped at Rs 50,000 and the lump sum payment capped at the lower end of 50% of the total eligibility amount or Rs 15 lakhs, for the limited purpose of medical treatment of the borrower, spouse and dependent person.
The money borrowed under the reverse mortgage loan, can be used for specific purposes like a medical emergency, day-to-day needs, repairs and renovation of the property, and repayment of loan taken for the same property. The money borrowed cannot be used for business or trading, including any speculative purposes. In addition to receiving lump sum or periodical payments, the facility of reverse mortgage can also be used for buying an annuity from a life insurance company. Under this, the lender hands over a lump sum to a life insurance company, so that the borrower can purchase an annuity.
Application and documents for the reverse mortgage scheme
A senior citizen above 60 years and who owns a residential house can avail of a loan under reverse mortgage scheme either individually or jointly with their spouse. In case of a couple, the other spouse should be over 55 years. The residential house should be owned by the senior citizen individually or jointly with the spouse.
Furthermore, a reverse mortgage loan can be availed on a property used as a primary residence. Hence, any leased residential or commercial properties cannot be offered as collateral. A property with an outstanding loan cannot be considered for a reverse mortgage loan until the whole loan has been repaid. However, part of the lump sum money received under the scheme can be used for repayment of the outstanding home loan. You need to submit a PAN card copy, list of legal heirs and a copy of your registered will, in addition to details of the mortgaged property with an application form. You have to intimate the lender about any future modifications in the will.
A list of the branches offering a reverse mortgage loan can be availed here: www.nhb.org.in/RML/List_of_Branches.php
Tenure, rate of interest and repayment for the reverse mortgage scheme
The maximum tenure of such a loan is generally 20 years during which you can receive a periodical stream of payment but can continue to stay in the house thereafter. Even after your death, your spouse can stay in the house till her/his death. The rate of interest will vary with different lenders.
In case you want to discontinue with the loan, you can prepay the outstanding amount any time without prepayment charges. As there is no income stream for senior citizens after retirement, the reverse mortgage loan need not be serviced during the lifetime of the borrower and the spouse. After the borrower’s death, the legal heirs have the right to redeem the property by paying the outstanding amount.
In case the legal heirs do not come forward to redeem the property, the bank will sell the house and pass on the surplus realised to the legal heirs. However, in no case shall the legal heirs be called upon to pay a shortfall.
(The author is chief editor – Apnapaisa and a tax and investment expert, with 35 years’ experience)