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Reverse Mortgage: A Side-income?





A reverse mortgage is a financial arrangement designed for senior citizens in India that allows them to convert a portion of the equity in their primary residential property into a regular stream of income or a lump sum payment, while still retaining ownership and the right to live in the property[1]. It is a way of using the home as a source of income for senior citizens who may not have adequate income to support themselves.


A reverse mortgage is a type of loan that allows senior citizens who own a house to get regular income from a bank or a lender, by using their house as a security. The borrower does not have to repay the loan during their lifetime, as long as they live in the house. The loan amount depends on the value of the house, the age of the borrower, and the interest rate[2]. The loan can be paid in monthly installments, lump sum, or as a line of credit.


The reverse mortgage loan scheme was introduced in India by the National Housing Bank, a subsidiary of Reserve Bank of India, to help seniors get easy access to much-needed finance. The scheme was meant to fill the gap created by banks not giving loans to senior citizens or them not having a pension plan to manage day-to-day expenses.


A reverse mortgage can help senior citizens who do not have enough income or savings to meet their expenses, or who want to improve their quality of life. It can also help them to maintain their independence and dignity, as they do not have to depend on their children or relatives for financial support[3].


Basic Features 


The basic features of a reverse mortgage loan in India are as follows:


  1. Eligibility: The borrower must be a senior citizen of India, aged 60 years or above, and must own a self-acquired or self-occupied residential property in India. The property should be free from any encumbrances and should have a clear title[4]. The borrower can also include his/her spouse as a co-borrower, provided the spouse is also a senior citizen.

  2. Loan amount: The loan amount depends on the value of the property, the age of the borrower, and the prevailing interest rate. Generally, the loan amount ranges from 60% to 90% of the value of the property. The maximum loan amount is capped at Rs. 1 crore for metropolitan cities and Rs. 50 lakhs for other cities.

  3. Loan tenure: The loan tenure can be up to 20 years or till the borrower's death, whichever is earlier. The loan can also be terminated if the borrower sells the property, moves out permanently, or fails to maintain the property or pay taxes and insurance.

  4. Loan disbursement: The loan can be disbursed in monthly, quarterly, half-yearly, or annual instalments, or as a lump sum, or as a combination of both, depending on the borrower's choice and need. The borrower can also change the mode of disbursement during the loan tenure, subject to certain conditions and fees.

  5. Interest rate: The interest rate is fixed or floating, depending on the lender's policy and the borrower's preference. The interest rate is compounded monthly and added to the principal amount. The interest rate is usually higher than the regular home loan rate, as the lender bears the risk of property value fluctuations and longevity of the borrower.

  6. Repayment: The borrower is not required to repay the loan during his/her lifetime or the loan tenure, whichever is earlier. The loan is repaid by the borrower's heirs or legal representatives after the borrower's death or the loan termination, by selling the property or by paying the outstanding loan amount along with the accrued interest. The borrower's heirs or legal representatives can also retain the property by paying the outstanding loan amount along with the accrued interest. If the sale proceeds of the property are more than the outstanding loan amount, the excess amount is paid to the borrower's heirs or legal representatives. If the sale proceeds of the property are less than the outstanding loan amount, the lender bears the loss and does not claim any amount from the borrower's heirs or legal representatives.

  7. Tax benefits: The loan amount received by the borrower is not considered as income and is therefore not taxable. However, the interest paid by the borrower's heirs or legal representatives is not deductible from their income[5].


Drawbacks 


However, there are some drawbacks of reverse mortgage, such as:


  1. The borrower may lose the ownership of the house if they fail to pay the property taxes, insurance, or maintenance costs.

  2. The borrower may not be able to leave the house to their heirs, unless they repay the loan with interest.

  3. The borrower may not be able to avail other loans or benefits, such as tax deductions, subsidies, or grants, based on the ownership of the house.

  4. The borrower may face difficulties in selling or renting the house, as the lender has the first claim on the property.

 

Banks offering Reverse mortgage Loans :

 

In India, reverse mortgage was introduced by the National Housing Bank in 2007.

Some of the banks in India that offer reverse mortgage loans are:


  1. State Bank of India (SBI): SBI offers reverse mortgage loans under the name of SBI Reverse Mortgage Loan. The loan amount ranges from Rs. 3 lakhs to Rs. 1 crore, depending on the value of the property and the age of the borrower. The interest rate is linked to the repo rate, and is subject to change every six months. The loan tenure can be up to 15 years or till the borrower's death, whichever is earlier. The loan can be disbursed in monthly, quarterly, half-yearly, or annual instalments, or as a lump sum, or as a combination of both. The interest rate is fixed at 10.75% per annum, compounded monthly. The borrower can also avail a top-up loan of up to 20% of the original loan amount after 5 years of the loan disbursement, subject to certain conditions and fees[6].


  1. Punjab National Bank (PNB): PNB offers reverse mortgage loans under the name of PNB Baghban Scheme. PNB offers reverse mortgage loans for senior citizens who have a self-acquired or self-occupied home in India. The loan amount ranges from Rs. 2 lakhs to Rs. 1 crore, depending on the value of the property and the age of the borrower. The loan tenure can be up to 15 years or till the borrower's death, whichever is earlier. The loan can be disbursed in monthly, quarterly, half-yearly, or annual instalments, or as a lump sum, or as a combination of both. The interest rate is fixed at 10.75% per annum, compounded monthly. The borrower can also avail a top-up loan of up to 50% of the original loan amount after 5 years of the loan disbursement, subject to certain conditions and fees[7].


  1. HDFC Bank: HDFC Bank offers reverse mortgage loans under the name of HDFC Home Equity. The loan amount ranges from Rs. 3 lakhs to Rs. 15 crore, depending on the value of the property and the age of the borrower. The loan tenure can be up to 20 years or till the borrower's death, whichever is earlier. The loan can be disbursed in monthly, quarterly, half-yearly, or annual instalments, or as a lump sum, or as a combination of both. The interest rate is floating, linked to the HDFC Retail Prime Lending Rate (RPLR), and is subject to change from time to time. The borrower can also avail a top-up loan of up to 25% of the original loan amount after 5 years of the loan disbursement, subject to certain conditions and fees[8].


Conclusion 

Reverse mortgage loans are a viable option for senior citizens in India who want to supplement their income and enjoy a comfortable and dignified retirement. However, before opting for a reverse mortgage loan, the borrower should carefully weigh the pros and cons, compare the offers from different lenders, and consult a financial advisor if needed.



[1] Reverse Mortgage Loans - Mortgage Loans for Senior Citizens, Rates .... https://www.paisabazaar.com/reverse-mortgage-loan/.

[2] SBI Home Loans : Reverse Mortgage Loan. https://homeloans.sbi/products/view/reverse-mortgage-loan.

[3] What is a Reverse Mortgage [Fundamentals With Example] - BankBazaar. https://www.bankbazaar.com/home-loan/what-is-reverse-mortgage-scheme.html.

[4] Reverse Mortgage Loan in India: Exploring Schemes and Benefits - NoBroker. https://www.nobroker.in/blog/reverse-mortgage-loan/.

 

[5] Reverse Mortgage Loan in India: Exploring Schemes and Benefits - NoBroker. https://www.nobroker.in/blog/reverse-mortgage-loan/.

 

[6] SBI Home Loans : Reverse Mortgage Loan. https://homeloans.sbi/products/view/reverse-mortgage-loan.

[7] Pnb Baghban- A Scheme For House Owning Senior Citizens https://www.pnbindia.in/personalloanforseniorcitizens.html

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