Reverse Mortgage Loans (RML) for uniform income after retirement:
Dwight L. Moody once rightly opined “Preparation for old age should begin no later than one’s teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement”. Where as we have Mr Raghav Sharma who believed otherwise, he never gave retirement planning a serious thought. He always believed that his meagre retirement corpus would be good enough to support the post-retirement years. Now that he is retired after completing 33 years of job, lives with his 56-year-old wife Ms Nita Sharma in their 3BHK independent villa in Mysore. However, the gradually rising health care costs along with inflation makes him apprehensive about the management of rising expenses with his limited income. He did not know that his income would fall short, and the cost of living would be so high in a post-retired life. Amongst all other assets, the villa forms the largest component of his wealth. He even considered selling off his villa and moving into a rented accommodation to take care of the burgeoning expenditure but Mr. Sharma’s emotional attachment to the house property deters him from doing so, meanwhile it was Reverse Mortgage Loans (RML) that came as a ray of hope to him.
Under Reverse Mortgage Loans (RML), Mr Sharma and all the other Senior Citizens who are facing a similar predicament can mortgage their house property to a Primary Lending Institutions (PLIs) like a Scheduled Bank or Housing Finance Companies (HFCs). In return, they receive periodic payments for the lifetime on monthly/quarterly/annually basis. Unlike other mortgages, they continue to use the mortgaged property as a primary residence for the entire life. They need not repay the loan instalment or the interest on the loan during their lifetime. Upon death, the lender will sell their house property to recover the amount of loan.
In India, Reverse Mortgage Loans (RML) are offered by Corporation Bank, LlC Housing Finance, National Housing Bank (NHB), Punjab National Bank (PNB), Dewan Housing Finance Limited (DHFL), State Bank of India (SBI), Indian Bank, Central Bank of India, Andhra Bank, Canara Bank, etc.
So, if you were confused till now between buying a home and living in rented accommodation, then purchasing a home now can be a beneficial option later from a retirement planning perspective. The home loan EMIs which you would pay now will come back to you in the form of annuity payment under Reverse Mortgage Loans (RML).
The following table provides a glimpse of features of Reverse Mortgage Loans (RML):
Eligibility for Reverse Mortgage Loans
You should be a Senior Citizen of India i.e. your age should be more than 60 years. You are allowed to make your spouse a joint borrower in the loan provided he/she is above 55 years of age. The property should be in your name, self-acquired and you should occupy it as a permanent primary residence. If it’s a commercial property or house property with encumbrances, then it will not be eligible as collateral under Reverse Mortgage Loans (RML). The residual life of your house property should be at least 20 years.
Tenure and Computation of the Loan Amount
The loan amount is available for a period not exceeding 20 years. The maximum amount of credit that you may get under Reverse Mortgage Loans (RML) would be equal to 60% of the value of house property or Rs. 1 crore, whichever is lower. The bank determines the loan amount by the market value of your property, your age and prevailing interest rate. In this process, it assures you about ‘no negative equity guarantee’ which means that the combined sum of loan principal plus the accumulated interest will not exceed the future value of your property. The bank would revalue your property once every five years during the tenure of the loan to revise the loan amount. Transparency is maintained in the process as you will receive a detailed table of calculations, the rate of interest and assumptions (if any) encompassing the methodology which the lender used to arrive at the loan amount.
Permitted use of loan amount
Your bank may restrict the usage of the volume of loan for the purposes like a supplement to pension, meet day-to-day needs, home improvement/ maintenance/ insurance of residential property, up gradation/ renovation/ expansion of residential property, medical treatment, etc. However, use of loan amount towards speculative, trading and business purposes is strictly restricted.
Manner of Loan disbursement
You may choose to receive the loan amount in periodic (monthly, quarterly, half-yearly, annual) instalments or as a lump-sum payment or as a line of credit. In the monthly mode, the maximum amount disbursed by the lender in one instalment is capped at Rs. 50000. If you opt for the lump-sum option, then the lump sum disbursement amount is restricted to 50% of the total loan amount and that too for medical treatment of self, spouse and dependants. You will get the remaining 50% of the loan amount in periodic instalments.
Cost involved in Loan Processing
The lender would charge loan processing fees the detailed schedule of which will be provided to you up front. The charges are as follows:
– Origination, Appraisal and Inspection Fees
– Verification Charges of external firms
– Title Examination Fees
– Legal Charges/ Fees
– Stamp Duty and Registration Charges
– Property Survey and Valuation charges
Settlement of Loan Amount
The loan becomes due and payable on expiry of 20 years or the death of last surviving borrower or when you decide to sell the house property or permanently shifts to any institution or relative’s home for aged care, whichever is earlier.
When the loan amount becomes due and payable, it is dealt as per the following situations:
– The last surviving borrower or your legal representatives are given an opportunity to repay the principal amount along with the accumulated interest and get back ownership of the house property.
– Upon the death of the last surviving borrower, the lender sells the residential property and settles the loan amount along with accrued interest. The surplus value after loan settlement will be given back to your legal representatives.
You get an option to prepay the loan before the expiry of the tenure of the loan, and the lender will not levy any prepayment penalty for such prepayments.
Conditions/Covenants that need to be fulfilled by you under Reverse Mortgage Loans (RML)
– You should continue to use the house property as your primary residence for the entire lifetime. If at any time during the loan tenure, your stay outside the mortgaged property exceeds one year, then it may amount to default in the eyes of the lender and may trigger foreclosure of the loan.
– You are not allowed to dispose of your mortgaged house property using will or testament. If you make testamentary disposition of your mortgaged property for some relative, then your relatives would be entitled to own such property only if they undertake to pay off the entire amount of loan and accrued interest.
– The bank may ask you to prepare a Registered Will naming the mortgaged property in its favour and which entitles it to recover the loan amount and accrued interest thereof from sale proceeds of the property. Additionally, he is obliged to return the surplus to your legal representatives.
– The bank may ask you to give an undertaking that the Registered Will that you have prepared in favour of the lender is the last Will, and you will not make any other will which adversely affects the rights of the lender in recovering his loan amount via the sale of the property.
– You will be required to insure the mortgaged house property against fire, earthquake, and other calamities.
– You will be needed to pay all the taxes, electricity charges, water charges and statutory payments which are related to the house property.
– You will have to maintain the mortgaged residential property in good and saleable condition.
– You will have to cooperate whenever the bank conducts an inspection of your residential property on its own or by its representatives at any time before the repayment of the reverse mortgage loan.
Situations that may lead to foreclosure of Reverse Mortgage Loans (RML)
– If you default in the payment of property taxes or maintenance/repair/insurance of the mortgaged house property, then the bank is entitled to foreclose the loan by the sale of the mortgaged property and utilisation of the proceeds to recover the outstanding balance of principal and interest.
– When you file for bankruptcy, it entitles the lender to ask for repayment of the loan.
– Your abandonment of the mortgaged property or giving away the property as donation may amount to foreclosure of RML.
– If you make any modifications in the mortgaged property; like renting out any part of the property, changing its ownership, taking new loans against it, changing its zonal classification, etc., that adversely affects the interest of the bank, then be prepared for a foreclosure of the loan.
– If you commit any fraud or misrepresentation, then your lender may ask for repayment of the loan amount.
– Any government action; that leads to the expropriation of your mortgaged house property for public use or condemnation of its use due to health or safety reasons may lead to foreclosure of your reverse mortgage loan.
Reverse mortgage loan offers several advantages as a retirement planning tool when one does not possess any alternate plan for leading a comfortable retired life. Under Reverse Mortgage Loans (RML), neither your credit history nor your current income forms the basis for determination of loan amount. You need not repay the loan during the loan tenure, and the annuity payments are not taxable in your hands. In spite of several advantages, reverse mortgage loan could not replicate the success in Indian market which it achieved in the West especially in the United States. It can be attributed to the numerous cultural and structural discrepancies. Firstly, Indians consider house property an inheritable asset that should be handed over to the next generation. Most of the senior citizens who possess substantial property don’t feel the need for such loans as they are looked after by their relatives. also, the borrower is unable to capitalise full value of the property as the maximum amount of credit is capped at Rs. 1 crore which makes Reverse Mortgage Loans (RML) a less lucrative bargain. Further “Getting a fixed income for a lifetime” is not an apparent feature as the maximum loan tenure is 20 years, therefore on surviving the entire loan tenure, the borrower will be in serious trouble if he is unable to repay the loan and does not possess an alternate accommodation. Thus, Reverse Mortgage Loans (RML) needs structural transformation on the grounds mentioned above to gain popularity among the Indian consumers.