The reverse mortgage is “a loan agreement in which a homeowner relinquishes equity in their home in exchange for regular payments”. It is similar to a housing loan except that in a housing loan the borrower pays a fixed EMI to the lending bank, while in a reverse mortgage the lender pays the borrower a fixed sum of money on a monthly/quarterly basis, the total payment being equal to the value of the properties and the interest on the amount of loan. After the death of the borrower, the housing company sale the property to recover the amount paid out along with interest at a similar rate.
Reverse mortgage as a product is fairly new to India. In India, the scheme of “reverse mortgage” has been introduced in 2007 by Ministry of Finance to help senior citizens owning a house but having insufficient income to meet their needs. The regulator of monetary policy in India,the Reserve Bank of India has decided the guidelines for lending and eligibility criteria for the borrowers who wants to avail such loans. Dewan Housing Finance Corporation Ltd. was the first institution in the country to introduce reverse mortgage product in the name and style of “Saksham”. Since then, most banks/lending institutions have come up with their own reverse mortgage products. These banks are State Bank of India, Punjab National Bank, Bank of Baroda, Central Bank of India, Union Bank of India, LlC Housing Finance, Indian Bank, Andhra Bank, Corporation Bank and Canara Bank.
The process is simple. If you are an owner of house fulfilling all the criteria mentioned above and have applied for the reverse mortgage loan, then the banks will decide the monetary value of your home based on various factors which drive the market. Based on this monetary value of your home banks will give maximum 60% to the monetary value of your home. The interest rate for such loans can either fixed or floating, depending upon the mutual agreement between the borrower and lender. The borrower has the option to receive the periodic payments on monthly, quarterly basis or in a lump sum. With each installment, the borrower loses the equity in his/her house. These loans are provided for the period of minimum 10 to 15 years, though some banks also offer a period of 20 years. Even if the borrower outlives the tenure, he has the full right to stay in the house. In this case, the loan settlement will be done after the death of the borrower.
The amount received by a borrower is a loan and not his income, so such income through the reverse mortgage is not liable to tax until the borrower transfers the ownership of mortgaged home to repay the loan. Lastly, under the reverse mortgage there is no loss of ownership of the house and all the same time a regular income is arranged at periodic interval, depending upon the mode of disbursement desired.
But reverse mortgage has failed to gain much popularity in India because of poor marketing strategies and lack of knowledge about it. The reason is the resentment among the heirs and family sentiments. Lengthy pronouncements, announcements and assertions aside, this endeavor only has a morally positive contribution for the general public. And as we see Reverse Mortgage gaining respect by the hour, it’s all the more reason to be optimistic.
Reverse mortgage loan is not new concept. It was introduced way back in 1961, in USA and since then it has been playing the vital role of helping senior citizens in creating required income in their need of an hour. Moreover, we have lost the days when parents used to live with their children until their death. Even if your children want to live with their parents, it might be not possible due to their commitment towards their careers and other roles in life. Some parents have their children settled in foreign countries and they don't want to relocate here. Moreover, we are in the era where everyone wants to have independent lives and sometimes parents also don't want to become a burden to their children. In all such scenarios reverse mortgage is your best option available.
