What reverse mortgage does for the senior citizen

By BankBazaar.com | February 1, 2010

Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps a better awareness had not been created about the product. The product is still evolving and may take on new dimensions depending on how the banks wish to  present its consumer appeal.

In 2007, the finance minister of India introduced a concept well-known and widely accepted in the West – Reverse Mortgage.

Reverse Mortgage – What is it?

A reverse mortgage (or lifetime mortgage) is a loan available to seniors. Reverse mortgage as its name suggests, is exactly opposite to a typical mortgage such as a home loan.

How does it work?

In a typical mortgage, you borrow money in lump-sum right at the beginning and then pay it back over a period of time using Equated Monthly Instalments (EMIs).

In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank in turn gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.

The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one 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. Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house.

What are the features of this loan?

The draft guidelines of reverse mortgage in India prepared by RBI 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% 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.
  • 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.

How is the loan paid?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore the remaining equity continues to grow.

When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.

What happens after the death of one of the spouses or both?

If one of the spouses die, the other can still continue living in the house. If both die, the bank will give their heirs two options – 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.

How much of an annuity income can my house generate using reverse mortgage?

The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property – which is currently in the region of 12% to 14%.

What is a loan to value ratio?

Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60%.

So, for e.g. If you pledge a property worth Rs. 60 L, then the loan amount that you can get is Rs. 36 L.

Does a person’s age affect the amount of annuity paid?

It certainly does. Higher the age, higher the annuity! Everything else remains the same.

Why is this scheme not popular?

Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps a better awareness had not been created about the product.

Secondly, the Indian banking industry caps the available loan amount at Rs. 50 L, instead of providing for an equitable percentage of the property’s value, and limits the loan period to a tenure of 15 years.

The product is still evolving and may take on new dimensions depending on how the banks wish to  present its consumer appeal.

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21 thoughts on “What reverse mortgage does for the senior citizen

  1. D.C.Verma

    The scheme is no doubt ,very good for a large number of senior citizens.Details of its implementation & implications involved in it are not known.As is well known,
    such shemes appear very simple but the clause ‘conditions apply’ which is generally found ,has lot of hidden meaning.Though,it appears,nosuch clause i
    s inserted here senior cirizens are generally afraid of hidden meaning.Though in dire need of cash money ,people don’t want to part with their property.
    Therefore it is needed that the scheme be advertised regularly and contact numbers/website be prominently displayed so that
    for any details querries can be made .For querries and answer tto it may be brought under ‘FAQ’ heading on the website.

    Reply
  2. shudip

    All the public and private sector banks act like extortionists and thugs. They can do nothing against coporate raiders who plunder them of thousands of crores of
    rupees. But they would hound the honest and the poor to the last paisa of their meagre savings. So you are offering one more scheme to befool retired people and
    and dupe them of their property built out of their hard earned savings.

    Reply
  3. jayaraman

    A fine article. Possibly additional info. such as likely monthly/quarterly amount obtainable to the reverse mortgager in the form of a ready rerconner will be very useful.

    Reply
  4. P.R.ANANDA MURTHY

    One of the conditions of this otherwise good scheme of REVERSE MORTGAGE is that the banks stipulate that the property must be self-acquired. This rules out all peoperties that are inherited and which are otherwise deserving for consideration.

    A typical case is this: an old house is inherited through a will. House is demolished and, with a bank loan taken by the spouse, a new house is constructed on the site. The new property is mortagaged to the nationalised bank in the normal course. Husband and wife are prepared to sign whatever papers bank wants before sanctioning a reverse mortgage loan. The only child,an adult son, is also prepared for it.

    Now,will the bank ,which already has given a loan for the construction of the new house, sanction a reverse mortgage?

    Will any one respond?

    P.R.Ananda Murthy
    Dated: 24th May 09

    Reply
  5. p.moan

    advantages not clear yet.why only 60% of the value??what happens to the balance 40%??but interesting scheme on the whole..

    Reply
  6. g venugopal

    the aim of the scheme is laudable. In this country manya good sceme is fouled up because of redtape and corruption. This could be very beneficial to those senior citizens whose children are away from parents more or less for good. However the scheme is to be properly and fully worked out and publicised so that it becomes attractive and popular. since real estate is continually appreciating in value, the percentage of remortagage value may be upgraded upto 80% of the current value

    Reply
  7. SURESH.N

    the aim of scheme is good to facilitate for benificial of senior citizens whose chlidern are away from parents. since property values are appreciating in every year based on GDP,the percentage of remortagage value may be upgraded upto 80% of the current value and other 20% shall be adjested as interest for 15 years. It is preferable the pay ment shall be done on monthly basis and lump sump in case of emergency for hospetilization.

    Reply
  8. Abril

    Hi,

    We have just added your latest post "BankBazaar : What reverse mortgage does for the senior citizen" to our Directory of Mortgage We are delighted to invite you to submit all your future posts to the directory and get a huge base of visitors to your website.

    Warm Regards

    Mortga-ge.info Team

    Reply
  9. P.R.ANANDA MURTHY

    I HAVE RAISED AN IMPORTANT QUESTION ON 24th May. An answer to this could benefit a number of senior citizens who inherited an old house that has been demolished and a new house built thereon.

    Reply
  10. hari alvares

    Pls let me know the name,Tel.no.the name of the person to contact of the banks or financial institutes who give the loans.
    tks

    Reply
  11. richard

    I am 65 years old owning a house in chembur, mumbai. will I be able to mortgage?

    Reply
  12. amit

    the value of flat is @80 lacs and above how much montly amount can be get availed i am age of 80 my wife is 70 yrs can i get reverse mortgage loan for 15 yrs my monthy requirement is @ 15000/pls suggest me which bank can give me a loan at lowest interest and reliable i am located at borivali west regds amit

    Reply
  13. mrs p mohan

    a small doubt…after the tenure of the loan,if it so happens that the house is sold to pay back the loan….since the money given is said to be a loan,will the amount be deducted as it is or is there an interest levied on that amount and then deducted..can someone please clarify?

    Reply
  14. P.R.ANANDA MURTHY

    THE CASE IS: AN APPLICANT INHERITED THROUGH HIS FATHER'S WILL AN OLD HOUSE. HE DEMOLISHED THE STRUCTURE, RAISED MONEY INCLUDING FROM A NATIONALISED BANK A LOAN FOR CONSTRUCTING A NEW HOUSE ON THE SAME SITE. THE SAME BANK IS HESITATING TO ALLOW REVERSE MORTGAGE ON THIS NEW PROPERTY AS THE OLD HOUSE WAS INHERITED AND NOT SELF-ACQUIRED. THE BANK NEITHER GIVES AN OFFICIAL REPLY NOR TELL WHAT FURTHER SAFEGAURDS IT NEEDS BEFORE SANCTIONING RM. THE APPLICANT AND HIS WIFE, BOTH SENIOR CITIZENS, ARE CLUELESS ABOUT WHAT TO DO NOW. THE GOVT SWEARS BY SENIOR CITIZENS BUT ITS ORGANS REFUSE TO SEE THE SPIRIT OF GOVT. DECISIONS. WILL ANY ONE OR A BANK CLARIFY?

    P.R.ANANDA MURTHY/ 19TH JAN 2010

    Reply
  15. subhashchandra Shah.

    This scheme is not successful & will not be prove better for for snr. citizens as there is non co-operation from bank. If I have property of Mkt value one crore then only bank gives 21lacs mex. i.e.21% only. Further In Delhi property registration was after 2002/2003 for co-operative society,where most of property sold prior to this is either on Power of attorney or morgauge with DCHFC. In our case society has no proper documents in that case no bank will give the loan to snr. Citizens.Govt/DDA has passed the rules for free hold but wherever Administrator is there how it is possible to make the property free hold. Unless it is free hold no loan can be granted by the bank.
    Govt has passed the rule for free hold either reg, power attorney holder or sales deed registered, in this case RCS office are telling that DDA has passes the orders unless sales deed is register no free hold as DDA require money.Prior to 2002/2003 there was not registration of Sales deed. In these case where snr. citizens will go? when RCS office does not approve The deed of Power of attorney holder as per the rules.this type of so many problems face by the citizens of Delhi. Only In case of Delhi due to politicians benefit rules are there but who is hearing senior citizens problems.
    One Idium is there when Raja is thief.e. corruptions how can public are safe? I think all rules and regulations are only for citizens & not for any Politicians In this case how a poor snr. citizen can get reverse morgauge?Any body can inter-van in this matter for the benefit of senior citizen.
    I am a retired person & suffers lot that why I went out of country to stay with my daughter. Like me so many snr citizens are in trouble by their childrans.The do not want to work or Earn in India But in free they require the property of their Parents and harrasing them? All everything left on God? how to survive is very big problem for snr. Citizens. Even Govt is reducing interest on FDRs. In other country Govt. is giving too much befits to snr. Citizens but In India nothing can be happened. If snr citizen will go to help with police for reg. of snr. citizen next time there will be a crime & snr citizens are Murdered in their Flats.

    Reply
  16. AKULA

    I AM 50YRS, NO INCOME SOURCE, AM I ELIGIBLE FOR REVERSE MORTGAGE LOAN , AT HYDERABAD

    Reply
  17. Anil Kumar

    No doubt the reverse mortgage scheme is very beneficial for senior citizens, but I think the same should be modified by the Govt. in respect of age factor. In some Govt. Departments, Companies, Govt. Authorities age of superannuation is 58. Further, there are lots of people who take Voluntary Retirements before superannuation age limit on the grounds of health reasons or some other family reasons. Hence, the age criteria for the above scheme should be modified suitable to cover the persons below 60 years of age also.

    Reply
  18. Paul Sharp

    Reverse mortgage enables citizens of 62 years age or older to get cash on the value of their home. They can live in their home for a fixed period of years and when they die their heirs can pay back loan to get the home ownership or lender can sell it to someone.

    Reply
    1. Team BankBazaar

      Hi Paul, You’re absolutely right! Hope this article helps you understand this better. Cheers, Team BankBazaar

      Reply

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