Reverse Mortgage: Unlocking Liquidity In Your Old Age

Even after a decade since their launch in India, reverse mortgage schemes have had a lacklustre performance. The primary reason behind this is that people in India attach a lot of emotional value to their homes. Property is supposed to be transferred from generation to generation, unless there is a grave financial crunch. However, these schemes are popular in many Western countries, where people look at these as a means for steady income after retirement.

What are reverse mortgage loans?

A reverse mortgage loan could simply be explained as a loan against property, with certain special features. Under such a scheme, a senior citizen who has a self-occupied house, may get a regular income or a lump sum amount by mortgaging the property to a bank or a financial institution. The payment mode could be lump sum, monthly, quarterly, yearly, etc, at a certain rate of interest.

In case of a regular payment system, banks pay you for a long period that may span over 20 years. Even if you have expensive homes in posh localities, there may not be a steady source of income after retirement. In such a scenario, the house becomes more of a liability, as you have to pay taxes, bills and maintenance costs, along with your personal expenses. Reverse mortgage comes to the rescue for such people.

The repayment

Under reverse mortgages, the repayment of the loan is done either by the person taking it or by his successors after the completion of term. A borrower may terminate the mortgage midway by paying the amount along with the interest and other bank charges. In case of death of the borrower, the legal heirs of the borrower can release the house by paying the amount due to the bank. If the borrower or his successor is not able to repay, the financial institution can recover the due amount by selling the house. Any excess amount received in the process is returned to the borrower or his legal heirs.

The eligibility

To avail of a reverse mortgage loan, the borrower should be above 60 years of age and have a self-acquired and self-occupied residence. Borrower's age, market value of the property and interest rates are the criteria upon which the loan is granted. While the borrower gets to reside in the house, he has to ensure payment of all dues, such as municipal taxes, utility bills, etc. While in a traditional house mortgage a borrower needs to show the proof of his ability to repay the loan, this is not required in reverse mortgage schemes; your property is your guarantee.

The benefits

• Under reverse mortgage, the borrower does not have to pay the principal or the interest amount during the loan tenure. 

• Considered a loan and not an income, the amount borrowed is not taxable. 

• While financial institutions keep the property as collateral, the ownership of the property lies with the borrower.

The shortcomings

• The amount disbursed towards reverse mortgage is much less when compared to the amount one can obtain by going for traditional mortgage. Banks generally cap the maximum loan amount at $10 million under such schemes. 

• Under such schemes, the loan tenure is generally not beyond 20 years. Suppose a person aged 60 years avails of a reverse mortgage for 20 years and lives beyond the loan term of 20 years. In such a situation, the borrower will have to repay the loan at the age of 80 to retain the house. 

• The biggest misconception surrounding such reverse mortgage is that people think that the property under the scheme gets irretrievably pledged to the bank.

Improvements required

• While life expectancy in India is typically 65 years, reverse mortgage schemes offer loans to people above 60 years. In such a scenario, the scheme doesn't serve the purpose because the person would have already spent a large part of his life. To make these schemes more relevant, the eligible age for availing of the loan could be reduced to 50 years. 

• To avail of a reverse mortgage loan, you have to self-occupy the property and it cannot be given on rent. This also affects the popularity of such schemes. In certain cases, the borrower in old age might not require the entire house, so he should be allowed to lease or partially lease the house to supplement his income. 

• Instead of 20 years, the loan tenure could be made borrower's lifetime.