Reverse Mortgage Loan Scheme

Reverse Mortage Scheme, 2008 was announced on 30th September 2008 to provide a way for senior citizens to encash the fixed assets held by them. National Housing Bank, Commercial Banks and housing finance companies are allowed to advance reverse mortgage to Senior Citizens. In this article, we look at the reverse mortgage scheme in detail.

Who can avail reverse mortgage?

Any individual who is above the age of sixty years or a married couple in which either the husband or wife is over the age of sixty years can avail reverse mortgage on a residential house property located in India.

What is reverse mortgage?

A reverse mortgage is the opposite of a traditional mortgage, wherein a property is pledged to the bank to receive periodic payments from the bank in the form of a reverse EMI, while the resident continues to reside in the property. When a reverse mortgage application is made, the property value of the residential property is calculated by the Bank. Based on the property valuation, the bank disburses a loan in periodic payment over the fixed loan tenure. With each reverse EMI received from the bank, the equity or the individual's interest in the house decreases. Hence, reverse mortgage is ideal for senior citizens who require regular income from a residential property

What type of property can be reverse mortgaged?

Residential house property located in India that is owned by the senior citizen and free of any encumbrances can be reverse mortgaged. Further, the property against which the borrower proposes to raise the loan should be his/her permanent primary residence. The property to be reverse mortgaged must also be self-acquired and self owned. Ancestral properties cannot be reverse mortgaged.

What documents are required to apply for reverse mortgage?

The bank processing the loan application would required documents and information as per the banks process. However, the property can be taken on mortgage after sanction by entering into loan agreement. In addition to the loan agreement, the mortgagor would be required to submit the following information:

Name and address of the owner of the capital asset;
Permanent Account Number of the owner of the capital asset;
Total area, including built up or covered area, of the capital asset;
Cost of acquisition and the year of acquisition of the capital asset;
Cost of improvement and the year of improvement of the capital asset;
Name, address and Permanent Account Number of all the legal heirs and estate of the owner of the capital asset;
A copy of the registered will of the owner of the capital asset including any changes made therein during the currency of the term of the loan.

How much loan can be sanctioned as a reverse mortgage?

The amount of loan to be sanctioned as reverse mortgage would depend on the value of the residential property mortgaged. Usually, a minimum loan amount of Rs.1 lakhs to a maximum of Rs.100 lakhs inclusive of interest is processed by the Bank. Also, banks usually provide loan of upto a maximum of 90% of the market value of the property depending on location. The margin for loan could be as follows, depending on the location of property:

Metro 10%
Urban 20%
Other areas 30%

Once the loan is sanctioned, the bank would pay the mortgagor reverse EMI in the form of periodic payments. In case the applicant requests, lump-sum payment in one or more trenches, can be disbursed as long as the aggregate amount disbursed as lump sum does not exceed 50% of the total loan amount sanctioned.

What is the repayment period for reverse mortgages?

Reverse mortgage loans can be extended for a period of upto 20 years. Usually, a minimum tenure of 15 years and a maximum tenure of up to 20 years is provided if the borrower's age is between 60 and 65. If the borrower's age is above the age of 65, a minimum tenure of 10 years and a maximum tenure of 20 years is sanctioned. There is NO prepayment penalty if the reverse mortgage loan is paid back by the borrower from his own verifiable legitimate sources. A penalty of 2% on the average balance of the preceding 12 months could be applicable if the loan is taken over by any other Bank /FI or adjusted by the borrower in lump sum from any third source/party (except genuine sale).

How are reverse mortgages paid back?

Reverse mortgages can be paid back by the borrower at any time. In case the reverse mortgage is not paid back by the borrower, on the death of the last surviving borrower, the property is offered to the relatives on payment of the mortgage due. If the relatives do not pay back the mortgage, the property is sold for the realisation of the dues.

Are reverse mortgage payments taxed?

The money received by the borrower under the reverse mortgage is not treated as income as per exemption under Section 10 (43) of the Income Tax Act. If the property is sold by the bank or borrower or legal heir, capital gains would be applicable as per the provisions applicable to the general sale of the property. If the legal heirs settle the loan and do not sell the property, then no tax implications will arise as a redemption of the property does not amount to transfer.