Introduction

For most of us, the house is the largest component of our wealth, particularly for senior citizens who stay in these houses post-retirement.

As you are aware, a Housing Loan Scheme is where you take a loan from the Bank to buy a house and make periodic EMI payments to repay the loan. On full repayment of the outstanding loan, the original property documents are returned to you and the mortgage is released. 

Conceptually, a Reverse Mortgage scheme is the opposite of the Housing Loan scheme. It involves the house owner mortgaging his/her house property to a bank, which then makes periodic payments to the house owner during his/her lifetime (maximum 20 years, at the discretion of the bank). 

On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. Alternatively, the borrower or their heir(s) can also repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.  

Thus, Reverse mortgage is a financial product that enables senior citizens (60 + years) who own a house to mortgage their property with a Bank and convert it into tax-free income without having to sell the house. 

Qualifications for reverse mortgage eligibility

• Should be a senior citizen of India above 60 years of age
• Married couples will be eligible as joint borrowers provided one of them is above 60 years of age and other not below 55 years of age
• Should be owning a self-occupied and self-acquired property

Benefits of a Reverse Mortgage loan

It aims at partially meeting the financial needs of senior citizens without selling the property and enables recurring fund inflows to the senior citizens during their lifetime.

After the death of the senior citizen, the surviving spouse can continue to occupy the property till his/her demise.

Amount of Monthly Inflow

The amount of monthly inflow will depend on market value of residential property, age of borrower(s), and prevalent interest rate. Over time, interest charges are added to the loan amount, thus the loan amount rises. 

Presently, the interest rates on reverse mortgage loans are 2-3 percentage points higher than housing loan interest rates. 

Nature of Payment by Bank to Borrower

• Periodic payments – Monthly/Quarterly/Half Yearly/Yearly
• Lump-sum payment in one or more tranches

Period of Loan

The maximum tenure of the loan is usually 15 to 20 years, at the discretion of the bank.

Settlement of Loan

• The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home to an old age institution or to be with children/relatives.
• Settlement of loan along with accumulated interest is to be met by the proceeds received out of sale of residential property.
• The balance surplus (if any) remaining after settlement of the loan with accrued interest, shall be passed on to the legal heirs/estate/beneficiaries of the borrower.
• If the value of the property is less than the loan amount due, the borrower is not obliged to pay the deficit to the bank.
• However, the borrower(s) or his/her/their heirs/estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.

Prepayment of Loan by Borrower(s)

The borrower(s) will have the option to prepay the loan at any time during the loan tenor.

There will not be any prepayment levy/penalty/charge for such prepayments.

(The above article has been compiled from the NHB website (https://nhb.org.in/RML/guidelines.php) and other available sources on reverse mortgage loans. The writer is currently pursuing PhD on the topic of Reverse Mortgage loans as a Retirement Planning tool. Readers are kindly requested to contribute to her research by filling up the questionnaire, the link for which is https://forms.gle/1pRY1xfFo8b3yNW88. All data received will be kept strictly confidential and will be used strictly for academic purpose only).