Reverse Mortgage was introduced in India in 2007 by then Finance Minister Shri P. Chidambaram. It was a novel scheme conferring social security to senior citizens. However it failed to find takers because of many reasons like
However this scheme has regained importance after Banks have tied-up with insurance companies. Now the banks are willing to offer higher loans with lower margins. Earlier the stream of cash flow continued during the tenor of the loan, now installments continue during the life of the borrower.
What is Reverse Mortgage ?
It is a scheme whereby senior citizens can monetize their house property to receive period installments or lumpsum during their lifetime. This income may prove crucial to retired persons who largely depend on pension and interest.In addition this income has been exempted from tax under section 10(43) and Capital Gains on transfer of house property to bank.
This scheme is available in all the major Commercial Banks and National Housing Bank.
Let us look into the process in some detail -
1. The senior citizen aged 6o or above should own and permanently reside in a house property. The house property may be in the join name of this spouse.The residual life of the property should at least be 20 years
2 The title deed of the house property is deposited with the bank in exchange for a stream of cash inflows in lumpsum or annuity over a period of 15-20 yrs depending on the value of the property.
3. At the end of the tenor the bank sells the house property and realise the amount due.However the legal heir is given an oppourtunity to meet the loan and retain the property.
The loan amount depends on the value of the property. The Bank estimate the value of the house property and lend upto 90% of the value of the property.The cash inflow being the present value of the annuity to equal loaned value of property (i.e 90% of value or such other rate as the case maybe) at end of loan tenor. Revaluation of the property is done every 5 years or so and the installment is adjusted to equal realisable value at end of tenor.The total amount of loan has been restricted to 1 crore, even if property is valued higher.
Important Conditions of Reverse Mortgage
There are also some restrictions on the purpose to which this income can be applied. This income can be applied to meet household expense, medical expense, house repairs etc... but this cannot be used for speculative investments, trading or business purpose.
The owner of the property is also required to keep the house in proper condition and to incur repairs if necessary.
Banks usually demand a Life Certificate of the property to be produced from a empanelled architect/engineer stating that the residual life of the property is at least 20 years.
Borrower is also required to keep the property insured and if insurance is not taken the Bank may adjust the installment amount and meet the insurance cost themselves,.
The house property should be free from encumberance.
When the property is in the name name of the borrower and loan is availed jointly with spouse then a will transferring the title to spouse should be executed superceeding the provisions of any preceeding will.
Repayment/Prepayment and Foreclosure
The loan need not be repaid over the life of the borrower. In the event of death of borrower the bank sells the property subject to legal heirs right to repay the loan and take possession of the mortgaged property.The balance surplus (if any), remaining after settlement of the loan with accrued interest and expenses, shall be passed on to the borrower or the estate of the borrower/legal heirs.
On the other hand, if borrower discontinues to live there, become bankrupt, compulsory acquisition by Government, fraud or misrepresentation by borrower or any other even affecting repayment prospects the loan becomes liable for foreclosure. The loan should be repaid along with interest by the borrower.
- unattractive valuation of property
- short inflow period
- cultural conflicts (descendant have rights over ancestral property)
However this scheme has regained importance after Banks have tied-up with insurance companies. Now the banks are willing to offer higher loans with lower margins. Earlier the stream of cash flow continued during the tenor of the loan, now installments continue during the life of the borrower.
What is Reverse Mortgage ?
It is a scheme whereby senior citizens can monetize their house property to receive period installments or lumpsum during their lifetime. This income may prove crucial to retired persons who largely depend on pension and interest.In addition this income has been exempted from tax under section 10(43) and Capital Gains on transfer of house property to bank.
This scheme is available in all the major Commercial Banks and National Housing Bank.
Let us look into the process in some detail -
1. The senior citizen aged 6o or above should own and permanently reside in a house property. The house property may be in the join name of this spouse.The residual life of the property should at least be 20 years
2 The title deed of the house property is deposited with the bank in exchange for a stream of cash inflows in lumpsum or annuity over a period of 15-20 yrs depending on the value of the property.
3. At the end of the tenor the bank sells the house property and realise the amount due.However the legal heir is given an oppourtunity to meet the loan and retain the property.
The loan amount depends on the value of the property. The Bank estimate the value of the house property and lend upto 90% of the value of the property.The cash inflow being the present value of the annuity to equal loaned value of property (i.e 90% of value or such other rate as the case maybe) at end of loan tenor. Revaluation of the property is done every 5 years or so and the installment is adjusted to equal realisable value at end of tenor.The total amount of loan has been restricted to 1 crore, even if property is valued higher.
Important Conditions of Reverse Mortgage
There are also some restrictions on the purpose to which this income can be applied. This income can be applied to meet household expense, medical expense, house repairs etc... but this cannot be used for speculative investments, trading or business purpose.
The owner of the property is also required to keep the house in proper condition and to incur repairs if necessary.
Banks usually demand a Life Certificate of the property to be produced from a empanelled architect/engineer stating that the residual life of the property is at least 20 years.
Borrower is also required to keep the property insured and if insurance is not taken the Bank may adjust the installment amount and meet the insurance cost themselves,.
The house property should be free from encumberance.
When the property is in the name name of the borrower and loan is availed jointly with spouse then a will transferring the title to spouse should be executed superceeding the provisions of any preceeding will.
Repayment/Prepayment and Foreclosure
The loan need not be repaid over the life of the borrower. In the event of death of borrower the bank sells the property subject to legal heirs right to repay the loan and take possession of the mortgaged property.The balance surplus (if any), remaining after settlement of the loan with accrued interest and expenses, shall be passed on to the borrower or the estate of the borrower/legal heirs.
On the other hand, if borrower discontinues to live there, become bankrupt, compulsory acquisition by Government, fraud or misrepresentation by borrower or any other even affecting repayment prospects the loan becomes liable for foreclosure. The loan should be repaid along with interest by the borrower.
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