Reverse mortgage: Monetizing residential property retaining the property rights
Reverse mortgage is a financial product that allows elderly homeowners to borrow against their property. Under the scheme, a senior citizen can mortgage their residential property to the lender, who will then pay the borrower a certain amount of money on a regular basis. The borrower can choose to receive the payment in the form of a lump sum, monthly, quarterly or annual payments, or as a line of credit. The amount of money that can be borrowed is determined by the value of the property, the borrower’s age, and the prevailing interest rate.
The borrower retains ownership of the property and can continue to live in the property until they die, after which the property is sold and the loan is repaid with interest from the sale proceeds. If the sale proceeds are higher than the loan amount and interest, the excess amount is passed on to the borrower’s legal heirs. If the sale proceeds are lower than the loan amount and interest, the lender cannot recover the shortfall from the borrower or their heirs.
The In India, reverse mortgages are regulated by the National Housing Bank (NHB) and are available to senior citizens above the age of 60 years.
Benefits of Reverse Mortgage in India:
- Supplement retirement income: Reverse mortgages can provide a source of regular income for senior citizens who may not have enough retirement savings.
- No repayment required: Unlike traditional loans, reverse mortgages do not require borrowers to make monthly repayments. The loan amount and accrued interest are usually paid back by the sale of the property after the borrower passes away or permanently moves out.
- Tax-free income: The income received from a reverse mortgage is tax-free, which can be a significant advantage for borrowers who need additional income but want to avoid paying taxes.
- Retain ownership of property: Borrowers can continue to live in their homes and retain ownership, which means they can still benefit from any potential increase in property values.
Drawbacks of Reverse Mortgage in India:
- High interest rates: The interest rates for reverse mortgages in India are usually higher than traditional home loans, which can make them expensive in the long run.
- Limited loan amount: The loan amount for a reverse mortgage is based on the value of the property, and the maximum loan amount is usually capped at Rs. 1 crore. This may not be sufficient for borrowers who need a larger amount of cash.
- Risk of losing property: If borrowers are unable to repay the loan amount and interest, they risk losing their property to the lender.
- Limited options for heirs: When the borrower passes away, their heirs may have limited options for retaining the property or repaying the loan, which can lead to a loss of inheritance.
It’s important to carefully consider the benefits and drawbacks of reverse mortgages in India before deciding whether they are a good option for your financial needs. It’s also advisable to seek the advice of a financial advisor or lawyer to understand the terms and conditions of the loan agreement.
The following Banks offer reverse mortgage on residential property. In India, mortgage amount is capped at Rs. 1 crore. Loan amount can be taken in monthly, qurterly, semi-annually or annual basis
State Bank of India
Resident Type: Resident Indian
Minimum Age: 60 years for single borrower. For join borrower, younger spouse should be at least 58 years Loan Tenure : 10-15 years, depends on age of borrower Loan Amount: Minimum Rs. 3 lakhs & Maximum Rs. 1 crore LTV – In metro – 90%, Urban – 80%, rest – 70% Interest Rates – 8.7% onwards
Bank of Baroda – Baroda Ashray Resident Type: Resident Indian Minimum Age: 60 years Loan eligibility upto 1 crore
Union Bank reverse mortgage Loan – Rs. 1 lakh – 1 crore Lumpsum payout only for medical reasons Loan eligibility- Depends on value of property Payment Tenure– 15 – 20 years, if Borrower is aged between 60-65 years. Above 65, Tenure is 10-20 years
These loans like home loans has processing fee and taxes. Generally senior citizens get 40-60% of the home value as per news sources. It is ideal for senior citizens who don’t have adequate savings. It is also an option for high medical expenses.
