Reverse mortgage is a way to receive a regular income against mortgaging a residential property. It is just the reverse of home loan where a certain amount of loan is repaid in installments. In this case, a person receives a stream of income regularly against the mortgaged property.
Introduced in 2007 by Union Government of India, this scheme was launched to facilitate mainly the senior citizens against their medical bills and increased cost of livings.
Highlight of this scheme is that the borrower and his/her spouse can use the residential property for the purpose of living until their death through reverse mortgage.
Conditions for Reverse Mortgage:
• The age of the applicant must exceed 60 years and the co-applicant i.e. the spouse must be above 58 years of age.
• A senior citizen must own a property which is required to pledge for a monetary value.
• It must be located in India and should be self-occupied.
• No encumbrances shall be attached to the property and should have a minimum life of about 20 years.
• The maximum amount of mortgage amount cannot exceed 60% of the value of the property.
• General tenure of mortgage ranges from minimum 10 years to maximum 15 years. However, few banks offering tenure of 20 years as well.
Procedure for Reverse Mortgage:
• After complying the conditions, the applicant can apply for the reverce mortgage with required documents.
• The lender/bank will evaluate the value of property taking into account various factors including condition of the property, its demand in the market and the value of other properties at par with it.
• Periodic payment of loan decided after taking into consideration price fluctuations and margin of interest cost.
• The mortgaged property gets reevaluated once every 5 years and borrowers may ask to increase the amount of loan, in case the value of the property inflates. Alternatively, lump sum amount can also be procured from the lender.
• The interest paid on reverse mortgage could be floating or fixed depending upon the market norms.
• Loan can be availed in monthly, quarterly or yearly installments. It can also be procured in lump sum by the borrower.
The amount received under reverse mortgage is treated as loan not an income. Hence it is not liable for taxation. However, in the course of repayment of mortgage loan; any capital gain arising attracts a capital gain tax.
Settlement of Reverse Mortgage:
• The liability to repay the mortgage loan arises with the death of last surviving spouse.
• Either the heirs of the property may arrange to settle the loan amount along with accumulated interest to receive the ownership of such property; otherwise the bank arranges to sell off the property to recover the loan amount.
• If the bank receives an amount greater than the loan amount together with accumulated interest, the difference is passed on to the legal heirs of the property. But in case the sale proceeds of the property are less than the loan amount, the difference cannot be recovered from the legal heirs of the property.
Foreclosure of loan could be possible, if borrower:
• Not staying continuously for a year in the property against which mortgage loan is acquired.
• Renting a part of property.
• Adding a name into ownership of the property.
• Fail to insure the house or fail to pay the property tax.
• Abandons or donates the property.
• Declared as bankrupt.
Other highlights of Mortgage loan:
• If the borrower or his/her spouse outlive the period of tenure, the bank cannot get the property vacated to recover the loan. Bank will either wait till the borrowers die to settle the loan amount.
• But after the completion of tenure, the bank stops the monthly installment payments to borrower.
It is however a difficult, complicated and tedious process. Even there is no provision of increasing monthly payouts. This modern option to finance your retirement via mortgaging a residential property has not gained much popularity in India due to lack of marketing strategies.
But, it is surely a viable solution for senior citizens in terms of financial sufficiency. A professional assistance is always recommended to plan out a sound retirement.