How does reverse mortgage work in India ?

In India, we pride ourselves for our family values and joint family support system. But the urban culture is creeping in all corners of India. “Independence” has become a catch word for not only the younger generation but also for the senior citizens. Today’s grandparents want to live life on their own terms and do not want to be financial dependent on their children. Many provide for the retirement years through savings. But often the income required for retirement is underestimated or due to some reason a chunk of the retirement funds are used for other purposes like medical emergencies, child’s education etc.

Coming to the rescue of senior citizens who need a steady income during their golden years is reverse mortgage. Highly popular in the west, reverse mortgage unlocks your the money locked in you most important asset – your home. Let us check out how does reverse mortgage work in India.

What is reverse mortgage?

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. Reverse mortgage is meant for providing a regular monthly income for senior citizens. To take a reverse mortgage loans you must:

• Be of 60 years and above
• Own a residential property which is fully self occupied

With a reverse mortgage, you can turn the value of your home into cash without having to move from your home.  The loan availed could be between 60-90% of the property value. You can avail the reverse mortgage loan as a lumpsum of cash or as a regular monthly cash advance(like a salary) or even as a ‘credit line’ account that lets you decide when and how much of your available cash is paid to you or as a combination of these payment methods. The current rate of interest prevailing on reverse mortgage loans is around 14.50-18.00% per annum. A small processing fee is charged too. The interest is calculated till maturity and included in the total loan amount. That is a nutshell is how reverse mortgages work in India.

No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

The value of the house will be determined by independent valuation through the generally accepted property valuation methodology in the industry. Though there would be a provision for periodic valuation (typically every 5 years) and consequent adjustment of payments, the loan amount will be fixed on the basis of current value and not on possible future appreciation.

Image Courtesy – Hindu BusinessLine

What happens after the loan tenure?

If the borrower and /or his spouse outlive the tenure of the loan, he will not be asked to move out of the house. Although payments will stop after tenure of the loan is over, the interest will keep accumulating till the accounts are finally settled.

The accounts will be settled by the lender only after the borrower’s death or if he vacates or sells the property. The settlement of the outstanding loan amount, along with the accumulated interest, will be met by the proceeds of the sale. In the event of his death, his spouse can continue to occupy the property until her demise.

If both the borrowers are no more, the bank will give the legal heirs the first right of refusal to repay the loan and claim the property. In case they do not wish to do so, the house will be sold and bank will reclaim the outstanding amount. Any amount that remains will be given to the legal heirs.

How does reverse mortgage work – quick facts

• To qualify for a reverse mortgage, you must own and occupy your home. Also the house must not be let out even partly.
• The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
• Because you keep the title to your home, you are responsible for taxes, repairs, and maintenance.
• Depending on the reverse-mortgage plan you choose, your reverse mortgage becomes due, with interest, when you move, sell your home, die, or reach the end of the selected loan term.
• The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually paid off by refinancing it into a forward mortgage (assuming the heirs are eligible) or with the proceeds from the sale of the home.
• A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must do their best to maintain the value of the home with diligent upkeep.