Reverse Mortgage - Real Estate investing

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Reverse Mortgage is one of the investment tools that enable old people to liquidate their investments into homes at older age. Simply put, Reverse Mortgage is opposite of a conventional home loan. It allows the borrower to get a regular monthly income for stipulated time period from the lender against the mortgage of their house.

How does a reverse mortgage work?

When the house is pledged, the lending bank does the monetary evaluation of the property basis the demand for the property, current market price and the condition of the property. Once the financial value is arrived at, the loan as agreed with the borrower is lent in lump sum amount, yearly amount, quarterly or monthly amount as mutually agreed between the lending bank and the borrower.

A reverse mortgage is an ideal option for senior citizens who require regular income, or if the property is of illiquid nature for some reason.

General guidelines for reverse mortgage

The Reserve Bank of India has formulated the following guidelines for a reverse mortgage.

Maximum loan amount would be up to 60% of the value of the residential property.

Maximum tenure of the mortgage is 15 years and minimum is 10 years. Some banks are now also offering a maximum tenure of 20 years.

The re-evaluation pf the property is to be undertaken by the lender once every 5 years. If at such time, the valuation has increased, borrowers have the option of increasing the quantum of the loan. In such a case, they are given the incremental amount in lump-sum.

Amount received through reverse mortgage is a loan and not income. Hence it will not attract any tax. However, a borrower is liable to capital gains tax, at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.

Reverse mortgage interest rates could be either fixed or floating and are decided basis prevailing rates in the market.

Eligibility Criteria for reverse mortgage

House owners above the age of 60 years. If spouse is a co-applicant, then she should be above 58 years.

Owners of a self-acquired, self-occupied residential house or flat, located in India. The titles should be clear, indicating the prospective borrower's ownership of the property.

Property should be free from any encumbrances.

The life of the property should be of minimum 20 years and should be the permanent or primary residence of the individuals.

How Reverse Mortgage is settled?

A reverse mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property.

Any extra amount, after settlement of the loan with accrued interest and expenses, through the sale of the property, will be passed on to the legal heirs. If the sale proceeds are lower than the accrued principal plus interest amount, the loss is borne by the bank. This loss could happen in cases where the banks original estimation is not in line with the real estate market movement.

Other Factors

Prepayment of loan: Borrowers could prepay the loan at any time during the tenor of the loan, at no prepayment penalty or charges.

Outliving the tenure of the loan: If the borrower outlives the tenure of the loan, he could continue to stay in the house. The lending institution may however cease the monthly payments. Settlement of the loan is done only after the borrower's death.

Death of one of the spouses: If one of the spouses dies, the other can still continue living in the house. Only on death of both, settlement of the loan takes place.

Foreclosure: The loan could be foreclosed by the lender if

The borrower has not stayed in the house for a continuous period of one year.

The borrower has not paid property taxes and fails to insure the home

If the borrower declares himself as bankrupt.

If the mortgaged property is donated or abandoned by the borrower.

If the borrower makes changes in the residential property, that could affect the security of the loan for the lender. This could be renting out part or entire house, addition of a new owner to the house's title or creating further encumbrance on the property.

If the government under statutory provisions, seeks to acquire or condemn the residential property for health or safety reasons.

Drawbacks

Lengthy documentation procedures: Banks require various documents of the property. For a senior citizen this procedure could be tedious, complicated and difficult to understand.

Fixed monthly amounts: The monthly payouts are fixed. There is no provision to increase this amount in case of an emergency or contingency

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