Reverse Mortgage Loan

A Reverse Mortgage Loan is a type of Mortgage Loan for elderly citizens usually secured over a residential property, that enables the borrower to access the unencumbered value of the property. Borrowers did not need any monthly repayments but instead provides a regular annuity to the borrower for a specified number of years. The loan can be repaid during the lifetime of the borrower or else the ownership passes on to the bank which gave the mortgage after the demise of the elderly person and his/her spouse. The interest is added each month to the principal loan amount. The reverse mortgage allows home owners to utilise the equity they have in their homes to secure a sound financial future for themselves. Usually, home owners are entitled to make payments after they move out, sell or transfer the property. Moreover, after their demise, the heirs can choose to pay back the loan.

The reverse mortgage loan scheme was introduced in India by the National Housing Bank, a subsidiary of Reserve Bank of India, to help seniors get easy access to much-needed finance. The scheme was meant to fill the lacunae created by banks not giving loans to senior citizens or them not having a pension plan to manage day-to-day expenses.

Purpose of Reverse Mortgage Loan:

The purpose of taking a reverse mortgage loan might differ as per the needs of individuals but some reasons are common across most circumstances.

• In most cases, senior citizens find it hard to maintain their day-to-day expenses and their home with their limited income. They do not want to sell the house either because they had already invested so much money and effort in buying the property. In such situations, they may find the reverse mortgage loan as a good option to support their expenses and utilise the equity that they have built up on their houses.
• Seniors can also cover a medical emergency or take care of a genuine large expense that cannot be met with their pension income through a reverse mortgage loan.

Reverse Mortgage Loan Amount and Tenure:

The amount of reverse mortgage loan can start from a few lakhs, though the lump sum payment cannot exceed 50% of the total eligible loan amount, subject to an upper limit of Rs. 15 lakh. Some banks also follow a provision of providing up to 90% of the value of the property as a reverse mortgage loan.

The reverse mortgage loan is only given to a borrower whose age is at least 60 years. In case of a couple who want the loan, the age of the senior spouse must be at least 60 years and that of the younger one at least 55 years. The tenure of the loan is not more than 20 years. This means that the loan is available only till the person is 80 years old if the loan was taken when the borrower was 60 years old. However, the minimum tenure becomes 10 years if the age of the borrower is more than 65 years whereas minimum tenure becomes 15 years if the age of the borrower is between 60 and 65 years at the time of application.

Eligibility:

The eligibility criteria for a reverse mortgage loan are:

• The borrower has to be a citizen of India and should have a minimum age of 60 years.
• Married couples can jointly apply for the loan given that one of them has to be more than 60 years of age and the other should not be below the age of 55.
• The borrower has to be the owner of a self-acquired, inherited or self-occupied residential property in India. The title of the property should clearly indicate the borrower’s ownership and it has to be free from any liability, debt or other obligations.

Documents Required for Reverse Mortgage Loan:

Though the exact documentation requirements would vary from one bank to another, the following are some of the key documentation that an applicant needs to submit:

• Basic KYC documentation such as ID proof and Address proof, PAN card copy etc.
• Deed/Title of House which clearly mentions applicant’s name as owner.
• Any other documents pertaining to the property such as land use certificate, home insurance papers, etc.

Additional documents may be requested by the bank at its discretion.

Settlement of a Reverse Mortgage Loan:

The reverse mortgage loan becomes outstanding when the borrower dies or chooses to sell the house. In such situations, banks provide the option of settling the loan along with the accrued interest to the joint holder or the heir. The bank chooses to sell the property if they are unable to settle the loan along with the interest. If the sale results in an extra amount than the total due to the bank, then that sum is passed on to the next legal owners of the house. The loss is borne by the bank if the current value of the property is not sufficient to cover the principal amount along with the interest. This scenario is definitely less likely to happen but may occur when the estimation of the bank is not in alignment with the real estate market conditions.

Features of Reverse Mortgage Loan:

Some important features of reverse mortgage loans are explained here for reference in case you are looking for a reverse mortgage loan.

• Access to Cash: A reverse mortgage loan gives senior citizens easy access to cash. This allows them to be self-dependent and support their own needs. The money acquired in the form of loan can be used for anything such as settling old debts or dealing with a medical condition.

• No Need for Mortgage Payment: Many people take advantage of reverse mortgage loans as they are a sure way to get a secure steady income. In addition, reverse mortgage loans do not have to be repaid each month or during their tenure. The loan can instead be settled after closing. The borrower as such does not have to worry about the mortgage repayment and can use the loan amount as per their needs.

• Anytime Prepayment: Borrowers can prepay the loan anytime they want during the tenure without any prepayment charges or penalties. This is a great way to secure your property without paying extra money which you otherwise would have had to pay in any other type of loan.

• Extend the Life of Retirement Savings: Most people do not have large retirement savings. A reverse mortgage loan can help extend the life of their retirement savings by providing them extra financial support. In addition, the loan financially supports the children who are taking care of their elders as it gives the family extra funds to manage their expenses.

• The Value of the Loan Can Increase: The value of a reverse mortgage loan can increase with time. The loan value has a direct relation with the value of the property and as real estate prices always increase over the long term, they help boost the value of the loan also. The value of the house is appraised at the time of loan approval but it usually reassessed by banks at frequent intervals. Borrowers can refinance their reverse mortgage loans and get increased credit limit. This way they can also settle their previous mortgage as an increased value means that they can earn even more from the property.

Limitations of Reverse Mortgage Loans:

However, despite its several advantages, borrowers consider a reverse mortgage loan as a last resort of income. This is due to certain limitations of the product. Some of these limitations include:

• In reverse mortgage loans, the property is pledged to the lender. It means that the borrower is officially giving the rights of the property to the lender if the borrower is not being able to repay the loan. This is usually not acceptable to senior citizens who have built a home with a lot of effort and sacrifices.

• A reverse mortgage loan results in a large amount of accumulated interest. Also, variation in rates of interest can lead to serious repayment issues if the loan is not managed well.

• Borrowers who fail to pay their property taxes and home insurance may have to pay back their reverse mortgage loan earlier than anticipated. This can be a difficult situation as plans of receiving regular income for specific time period can collapse simply because the applicant forgot to renew their home insurance or pay their taxes in a timely manner.

• In most cases, people find it hard to understand the concept of reverse mortgage. In such situations, it is advisable to consult an experienced financial consultant before deciding to take a reverse mortgage loan.

• The monthly payouts are fixed for the borrowers. They usually cannot ask the bank for an increased monthly payout.