Reverse mortgage in India is slowly but surely becoming an acceptable means for the elderly to lead a dignified life through income from the home that they once built while they were earning.
Mr. Menon has been retired for almost a decade now and has been living a peaceful life with his wife. However with the rising cost of living and extra expenses of health care , he finds it difficult to survive on his meager pension alone. Having been an upright and sincere government servant throughout his life his only asset today is the house he built from the employee soft loan almost 2 decades back. His self esteem forbids him to ask money from children who are settled abroad. Reverse mortgage is an option that Mr. Menon was completely unaware of till recently. He can now opt for using his home to create financial security for himself and his wife without sacrificing his pride. This relatively lesser known concept of reverse mortgage in India is rapidly gaining acceptance in our society.
Basics of Reverse Mortgage in India
Reverse mortgage in India works just opposite of the conventional home loan. Here the owner offers the bank his house in lieu of money, where the bank does a valuation based on real condition of the house and the market prices. The bank then pays the owner the decided amount in installments as agreed upon providing a regular source of income till the time of death of the owner or the spouse after which the bank takes over the rights to the house.
Reverse Mortgage in India: RBI Guidelines
Reserve Bank of India is conservative while setting the norms for such transactions.
- The total amount of money that bank shall pay to the owner in such an arrangement shall not exceed 60-90% of the prevailing market value of the house at the time of pledging it.
- The total period of payment by the bank taking the mortgage shall not exceed 15 years despite the fact that some banks are actually giving for a longer period.
- Banks need to reassess the prevailing value of the property every 5 years to find out the financial viability of the mortgage.
- The banks are at liberty to introduce a fixed or floating interest rate as per the convenience of the owner who mortgages the property.
Eligibility Criteria for Reverse Mortgage in India
In order to be able to avail this facility the elderly citizen seeking the mortgage must fulfill the following criteria.
- The owner who mortgages such property should be at least 60 years of age and the spouse who becomes a co borrower in this case must be above 58 years.
- The house must be self acquired and self occupied by the borrower at the time of the mortgage.
- The borrower must be the clear owner of the property and the house must be free from all encumbrances.
- The bank must evaluate and determine that the expected life of the house at the time of mortgage is a minimum of 20 years.
How Reverse Mortgage in India is Settled?
Like any other mortgage the Reverse Mortgage in India is also guided by a few laid down stipulations by the RBI.
- The borrower may sell the property to settle the outstanding amount due to the bank in between the stipulated period. Otherwise the repayment can also be done after the death of the borrower by the surviving spouse.
- The bank may even sell off the house to settle the dues after death of the borrower. If the proceeds are more than the amount due then the balance is paid back to the surviving spouse or the legal heirs.
- This kind of loan can also be foreclosed provided the following conditions are met.
– If borrower does not stay in the house for more than a year.
– If the borrower defaults on tax payments.
– If the borrower declares bankruptcy and abandons the place for good.
– If the borrower is renting out the house for income generation.
Tax Implications for Reverse Mortgage in India
This facility is considered as a welfare measure and not a conventional credit facility both by the financial institutions as well as the government. Thus the amount received from the bank by owner in lieu of the reverse mortgage of his home is considered as a loan and not a source of income. Therefore it is exempt from taxation by the income Department and hence it becomes all more beneficial for the senior citizens who like Mr. Menon are earning some pension to get extra income through reverse mortgage without having to pay taxes on the money thus received.
Institutions that offer Reverse Mortgage in India
The most popular institutions that offers Reverse mortgage in India are
- State Bank of India
- Bank of Baroda
- Punjab National Bank
- Dewan Housing Finance Limited
This way people like Mr. Menon can continue to live life the way they want. Their self built house looks after the extra expenses,they need, at the late stage in life.
What do you think about reverse mortgage? Do you think reverse mortgage in India will help elderly to lead a dignified life?