Reverse mortgage is a scheme by which senior citizens can receive regular income against their property. The borrower has the choice of receiving the value of the property as a lumpsum amount (subject to maximum of 15,00,000 or 50% of the loan amount whichever is minimum, rest as annuity) or in the form of annuity paid to him at regular intervals.
Reverse mortgage hasn't made significant impact in India since its announcement by the government in its 2007 budget. However, since then the product has undergone some significant changes in its 2009 revamp. During this phase, the product was evolved to an annuity-based product with banks associating with insurance firms to make it more effective.
This would enable the senior citizen to obtain a higher monthly payout based on the value of the property. This amount is likely to increase with increase in age of the senior citizen. However, the borrower can limit the amount depending on whether he wants the money to be repaid to the bank and wants the property reclaimed by the heirs.
There are mainly two criteria for availing reverse mortgage loan. One, the beneficiary should be at least 60 years old; two, the beneficiary should own the house and there should be no outstanding loan against it.
Reverse mortgage hasn't made significant impact in India since its announcement by the government in its 2007 budget. However, since then the product has undergone some significant changes in its 2009 revamp. During this phase, the product was evolved to an annuity-based product with banks associating with insurance firms to make it more effective.
This would enable the senior citizen to obtain a higher monthly payout based on the value of the property. This amount is likely to increase with increase in age of the senior citizen. However, the borrower can limit the amount depending on whether he wants the money to be repaid to the bank and wants the property reclaimed by the heirs.
There are mainly two criteria for availing reverse mortgage loan. One, the beneficiary should be at least 60 years old; two, the beneficiary should own the house and there should be no outstanding loan against it.
Why reverse mortgage
Reverse mortgage is particularly helpful for retired people who wish to have a regular source of income but are stuck with no means to achieve this. They pledge their house to a bank and the bank ties up with an insurance company to provide them a regular income for a specified term of their life. Once the specified term is over, the beneficiary can still live in the house but there will be no regular payment from the bank against the property.
In the event of death of the beneficiary, the bank will ask the heirs to pay the outstanding and reclaim the house or the bank can sell the house to recover the outstanding. In most instances, the property value would have appreciated manifold and the remainder of the sale amount after closure of loan, will be handed over to the heirs.
Features of reverse mortgage:
l The maximum loan that can be taken under this scheme varies with banks. A few banks offer maximum loan amount of `50 lakh while some can go even up to `1 crore.
l The NHB (National Housing Board) has stated that the maximum tenure of reverse mortgage payment should not exceed 20 years and residual life of the property to at least 20 years. However, the owner and spouse can live in the house for the remaining part of their life beyond the term provided by the banks.
l Retired house-owners over the age of 60 can take part in the scheme. The wife should be more than 58 years of age if she is co-owner.
l The settlement of the loan is done after the last surviving borrower's death.
l No income tax on the sum received in reverse mortgage
Important points to consider
Banks do valuation of the property at regular intervals. You should discuss with the bank on the valuation intervals. The regular payment can change based on revaluation of property. You should also look at any clause that allows the bank to change the interest rate.
You should also check the processing fee and other charges such as documentation charges, insurance costs, closing costs by the bank on reverse mortgage. This could be a significant amount.
Discuss with bank and negotiate the charges. Finally, borrow only the amount you need to fulfil your monthly expenses. Never borrow more just because your property allows you to borrow a higher amount. This is especially important because people are living longer. Hence, you will need regular income for more number of years.How the reverse mortgage is calculated
There are three important parameters in reverse mortgage calculation, interest rate, loan to value ratio (usually 60%), and value of the property. Other factors such as borrower's age, type of reverse mortgage plan also impact the amount of loan.
Let's take an example. Mr Ignatius is 65 years old, his wife is 62. They have a property which is worth `80 lakh. They do not have any source of regular income. Hence, they opt for the reverse mortgage option.
Let's assume the following:
Present Value of the property (PV) = `80 lakh
Annual interest rate (R) = 10%
Loan to value ratio (LTVR) = 60%, hence loan = Rs 80 lakh * 60% = `48 lakh
Term (n) = 15 years = 15 * 12 months = 180 months
Payment = monthly
The monthly payment for reverse mortgage is the following:
Monthly payment to homeowner = PV * LTVR * R / (((1+R)^n) - 1)
The monthly payment using these parameters will be about `11,581. Please note that the number may change in individual cases.
The borrowers should do the due diligence before signing up for it.
Reverse mortgage is particularly helpful for retired people who wish to have a regular source of income but are stuck with no means to achieve this. They pledge their house to a bank and the bank ties up with an insurance company to provide them a regular income for a specified term of their life. Once the specified term is over, the beneficiary can still live in the house but there will be no regular payment from the bank against the property.
In the event of death of the beneficiary, the bank will ask the heirs to pay the outstanding and reclaim the house or the bank can sell the house to recover the outstanding. In most instances, the property value would have appreciated manifold and the remainder of the sale amount after closure of loan, will be handed over to the heirs.
Features of reverse mortgage:
l The maximum loan that can be taken under this scheme varies with banks. A few banks offer maximum loan amount of `50 lakh while some can go even up to `1 crore.
l The NHB (National Housing Board) has stated that the maximum tenure of reverse mortgage payment should not exceed 20 years and residual life of the property to at least 20 years. However, the owner and spouse can live in the house for the remaining part of their life beyond the term provided by the banks.
l Retired house-owners over the age of 60 can take part in the scheme. The wife should be more than 58 years of age if she is co-owner.
l The settlement of the loan is done after the last surviving borrower's death.
l No income tax on the sum received in reverse mortgage
Important points to consider
Banks do valuation of the property at regular intervals. You should discuss with the bank on the valuation intervals. The regular payment can change based on revaluation of property. You should also look at any clause that allows the bank to change the interest rate.
You should also check the processing fee and other charges such as documentation charges, insurance costs, closing costs by the bank on reverse mortgage. This could be a significant amount.
Discuss with bank and negotiate the charges. Finally, borrow only the amount you need to fulfil your monthly expenses. Never borrow more just because your property allows you to borrow a higher amount. This is especially important because people are living longer. Hence, you will need regular income for more number of years.How the reverse mortgage is calculated
There are three important parameters in reverse mortgage calculation, interest rate, loan to value ratio (usually 60%), and value of the property. Other factors such as borrower's age, type of reverse mortgage plan also impact the amount of loan.
Let's take an example. Mr Ignatius is 65 years old, his wife is 62. They have a property which is worth `80 lakh. They do not have any source of regular income. Hence, they opt for the reverse mortgage option.
Let's assume the following:
Present Value of the property (PV) = `80 lakh
Annual interest rate (R) = 10%
Loan to value ratio (LTVR) = 60%, hence loan = Rs 80 lakh * 60% = `48 lakh
Term (n) = 15 years = 15 * 12 months = 180 months
Payment = monthly
The monthly payment for reverse mortgage is the following:
Monthly payment to homeowner = PV * LTVR * R / (((1+R)^n) - 1)
The monthly payment using these parameters will be about `11,581. Please note that the number may change in individual cases.
The borrowers should do the due diligence before signing up for it.
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