A reverse mortgage loan (RML) is a unique loan product designed for senior citizens who own their own homes. Unlike a traditional mortgage where you make monthly payments to the bank, a reverse mortgage allows you to access the equity you’ve built up in your property and receive regular payments from the lender. These payments can be in the form of a lump sum, a line of credit, or monthly installments.
Reverse mortgage scheme in India
The concept of reverse mortgages is relatively new in India, with the first schemes being introduced in the late 2000s. The government has encouraged these schemes to provide financial security for senior citizens. However, the product hasn’t gained widespread adoption yet.
Eligibility criteria for reverse mortgage
To be eligible for a reverse mortgage in India, you must meet the following criteria:
- Age: Be a senior citizen, typically above 60 years old (age limit may vary depending on the lender)
- Citizenship: Be a resident Indian citizen
- Property ownership: Own a self-occupied residential property in your name (or jointly with your spouse)
- Property type: The property should be a self-occupied house or flat and not a rented property
- Loan to value ratio: The loan amount will be determined by the property’s value, your age and interest rates.
See also: What are reverse mortgage loan schemes
What can a reverse mortgage loan be used for?
The funds received from a reverse mortgage can be used for various purposes, including:
- Supplementing your retirement income
- Meeting medical expenses
- Upgrading or renovating your home
- Paying off existing debts
- Covering daily living expenses
There may be restrictions on using the funds for speculative purposes or business ventures.
Loan tenure under reverse mortgage
The loan tenure for a reverse mortgage is typically for a fixed period (10-15 years) or until a specific event occurs, such as the borrower’s passing or relocation to a nursing home.
How much loan can I get under reverse mortgage?
The maximum loan amount you can avail through a reverse mortgage depends on several factors, including:
- The market value of your property
- Your age (older borrowers are eligible for higher loan amounts)
- The prevailing interest rates
The loan amount is usually capped at a certain percentage of the property’s value (around 35-55%).
Can reverse mortgage loan be used to buy annuity?
While you can use the funds from a reverse mortgage for various purposes, there is no specific provision to directly use them to purchase an annuity. However, you could potentially use the money to invest in an annuity product yourself.
Income tax on reverse mortgage loan
The amount received through a reverse mortgage (lump sum or periodic payments) is not considered taxable income in India. However, you may need to pay taxes on any interest earned on the loan. It’s advisable to consult a tax advisor for specific guidance.
Property rights under reverse mortgage
Even though you receive money from the lender, you retain ownership of your property under a reverse mortgage. You can continue living in your home for as long as you meet the loan terms.
Property usage under reverse mortgage
You can continue to occupy and use your property as your primary residence under a reverse mortgage scheme. Renting out the property is usually not allowed.
Interest on reverse mortgage loans
Interest rates on reverse mortgages are typically higher than traditional mortgages. This is because the lender takes on the risk of not being repaid in full if the borrower lives a long life.
Reverse mortgage loan repayment
There is no mandatory monthly repayment requirement for a reverse mortgage. The loan becomes due when the borrower passes away, permanently moves out of the property, or breaches the loan agreement.
Reverse mortgage loan recovery
Upon the borrower’s passing or relocation, the heirs have two options:
- Repay the loan amount (principal + accrued interest) and retain ownership of the property.
- Sell the property to settle the loan. Any remaining amount after settling the loan goes to the heirs.
Documents to be submitted with RML form
The documents required for a reverse mortgage application may vary depending on the lender, but typically include:
- Identity proof and address proof
- Property ownership documents
- Income tax returns (if applicable)
- Property valuation report
Why are reverse mortgage schemes not popular?
There are several reasons why reverse mortgages haven’t gained widespread popularity in India:
- Lack of awareness: Many senior citizens and their families are unaware of this financial option.
- Hesitation to use home equity: Some people are hesitant to use their home equity as loan security.
- High-interest rates: The higher interest rates compared to traditional mortgages can be a deterrent.
Advantages of reverse mortgage
- Financial security: Provides a steady stream of income to supplement your retirement income and meet unexpected expenses.
- Aging in place: Allows you to stay in your familiar home environment for as long as possible, avoiding the emotional and logistical challenges of moving.
- No monthly payments: Eliminates the burden of making monthly mortgage payments, freeing up cash flow for other needs.
- Tax benefits: The money received through a reverse mortgage is not considered taxable income in India.
- Flexibility: You have the option to choose how you receive the funds (lump sum, monthly payments, or a line of credit), allowing you to tailor it to your needs.
Disadvantages of Reverse Mortgage
- Decreasing equity: As interest accrues on the loan, your home equity gradually decreases. This can leave less inheritance for your heirs.
- High costs: Reverse mortgages come with origination fees, servicing fees and higher interest rates compared to traditional mortgages.
- Risk of loan default: If you fail to meet the loan terms, such as paying property taxes or homeowner’s insurance, you could risk foreclosure and losing your home.
- Impact on government benefits: In some cases, receiving income from a reverse mortgage can affect your eligibility for certain government benefits.
Reverse mortgage providers in India
Currently, only a limited number of financial institutions in India offer reverse mortgage schemes. These include:
- State Bank of India
- Corporation Bank
- LIC Housing Finance Ltd.
- Shanti Housing Ltd.
It’s important to compare plans and interest rates offered by different lenders before making a decision.
Charges on reverse mortgage loans
Several charges are associated with reverse mortgages, including:
- Origination fee: A one-time fee charged by the lender to process the loan application.
- Mortgage insurance premium: May be required to protect the lender in case the property value falls short of the loan amount at maturity.
- Servicing fee: An annual fee charged by the lender for servicing the loan.
- Interest rate: Typically higher than traditional mortgages, reflecting the increased risk for the lender.
Understanding these charges is crucial when evaluating the overall cost of a reverse mortgage.
What can make RML popular in India?
Several factors could potentially increase the popularity of reverse mortgages in India:
Increased awareness
Educating senior citizens and their families about the benefits and risks of reverse mortgages can lead to wider adoption.
Competitive rates
As the market matures, lenders may offer more competitive interest rates and lower fees, making reverse mortgages more attractive.
Government Incentives
Government initiatives like tax breaks or subsidies could encourage seniors to consider reverse mortgages.
With increased awareness, competitive offerings and potential government support, reverse mortgages have the potential to become a valuable financial tool for senior citizens in India.
FAQs
What is the eligibility criteria for a reverse mortgage loan (RML) scheme?
The applicant must be a senior citizen (above 60 years of age). Married couples are eligible to be joint borrowers, with one of them being at least 60 years old and the other not younger than 55 years.
What is the tenure of reverse mortgage scheme?
The maximum restricted tenure for a RML is 20 years.
Is there a lower or upper limit on the amount you can borrow under RML?
The maximum monthly payment under this loan scheme is capped at Rs 50,000 and the maximum lump-sum payment to be made is 50% of the total loan amount with a cap of Rs 15 lakhs.
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