​​Namrata Singh, CFP & Chaitali Shah, MA (Economics)

A real life story

An old lady named Mrs.Veenu Shah – aged 68 years had lost her husband. She had no children and she lived alone in Mumbai.  Ramesh, who was her sister’s son, invited her to live with his family.  He told her, “Sell your house and come live with us. I will take care of you and manage your money.”  She was a simple lady with no experience in managing money and so she trusted her sister’s son.

Eventually, the money was taken by the sister’s son and she lived a miserable life with them. She wasn’t fed well and wasn’t taken care of. 

Mrs. Veenu Shah’s life would have been different had she known about the REVERSE MORTGAGE LOAN.

About Reverse Mortgage

Reverse Mortgage is a type of loan extended by Authorised Banks and Housing Finance Companies.

A Reverse Mortgage Loan provides an additional source of income for senior citizens who have a self-acquired or self-occupied home in India. This product is beneficial for senior citizens who do not have adequate income to support themselves. The Bank makes payments to the borrower /borrowers (in case of living spouse), against the mortgage of  their residential house property.

Please note that if one stays in rented accommodation, he / she is not eligible for a reverse mortgage loan.

Who is eligible to take Reverse Mortgage Loans?

• Senior Citizen – Resident in India above 60 years of age.
• Married couples are eligible as joint borrowers for financial assistance. The age criteria for the couple would be subject to at least one of them being above 60 years of age and the other not below 55 years of age.
• The residual life of the property should be 20 years
• The residential property should not have any other mortgage.
• The borrowers should use that residential property as permanent primary residence. Permanent primary residence refers to the self-acquired, self-occupied residential property where a person spends majority of his time.

 How does Reverse Mortgage work?

An individual who fulfils the above eligibility criteria can avail the reverse mortgage loan against the market value of his/ her residential property.

The eligible amount is decided based on the market value of the property, borrower’s age, interest rate and lender’s margin requirements.

For example, when a residential property valued at INR 1 crore is used to take a reverse mortgage loan where the lender’s margin is 20% and the loan tenure is 20 years. The amount available to the borrower is calculated after deducting the lender’s margin requirements. Here the amount available to the borrower would be =

INR 1 crore – 20% of INR 1 crore =  INR 80 lacs

Please note that most banks/housing finance companies have capped the amount of reverse mortgage loan at INR 1 crore, even if the property value is much more.

The borrowers can opt to receive lump sum payments or periodic payments and are not required to give up their ownership or title during the loan tenor. The loan thus received can be used to meet day to day living expenses, medical expenses, renovation of the house, etc. Speculation and business expenses are not allowed.

It is important to note that the responsibility of property maintenance remains with the homeowner. One cannot sell the property till the reverse mortgage loan is paid back in full.

Loan repayment

No loan repayments are required during the borrower’s lifetime. The borrowers can continue living on the property as long as they are alive.

In case the borrowers stop residing in the property permanently or in case of their demise, the lender can auction the property for loan recovery. The legal heir can choose to repay the borrowed amount and retain ownership of the property after the demise of the borrowers.

The borrower can also reclaim the property rights after repayment of the loan liability in full.  There are no pre-payment charges applicable.

Tax Liability

The loan amount received from the bank as a lump sum payment or monthly instalment is not treated as income earned by the senior citizens and is exempt from tax under Section 10(43) of the Income-tax Act, 1961.

Authorised banks like State Bank of India are currently offering Reverse Mortgage Loan at an Interest Rate of 9.05% with 0.50% processing fees. As a senior citizen, if meeting day to day expenses is getting difficult, one can opt for reverse mortgage loans from RBI registered banks and Housing Finance Companies. Always remember to read the terms and conditions of the reverse mortgage loan document carefully before signing it and select a RBI Registered service provider that meets your personal requirements.

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Namrata Singh is a Certified Financial Planner with more than 14 years of experience in banking and wealth management. (namrata@asinvestment.in)

Chaitali Shah, MCom & MA (Economics) was a Financial Economics – Faculty at Wilson College, Mumbai (info@wealthron.com)
(Please note all views are personal)

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