Until recently, residential property could either be used for accommodation or as a source of rental income. From 2007, homeowners got a chance to have their cake and eat it too. The Reverse Mortgage Scheme introduced by the National Housing Bank allowed senior citizens (those over 60 years of age) to monetise their property to meet their expenses. As the name suggests, reverse mortgage is the opposite of a home loan. While a home loan enables income earners buy a house on installments, a reverse mortgage allows home owners earn regular income by promising to transfer their homes to the lender at a future date.
A lender, after valuing the property, will extend the RML either in the form of a lump-sum amount or a monthly payment, depending on the borrower’s choice. For instance, if the house is worth Rs 40 lakh, the borrower can get a lump-sum payment of Rs 24 lakh (assuming a loan to value ratio of 60%). A 15-year monthly installment arrangement will yield Rs 5,530 per month (Source: NHB calculator). The money cannot be used for speculative purposes such as investing in shares, real estate, trading and so on. “The bank has the option to revise the periodic/lump-sum amount every five years after conducting a re-valuation. If the property prices fall, the bank may revise the amount at any time earlier than five years. At every stage of revision, it is to be ensured that the loan-to-value (LTV) ratio does not exceed 90% at maturity,” informs a senior SBI official.
Thanks to its utility as well as investment value, most Indians strive to buy a house during their working years. Before the launch of RML, an individual could encash his/her home equity by mortgaging the property, which meant that chances of ceding ownership were high, with repayment being difficult due to the absence of incremental cash flows. In contrast, with RML, the borrower has to worry about neither repayment nor loss of ownership. The borrowers can continue to live in the house during their lifetime, even after the expiry of the loan tenure. “Periodic payments under RML, though, will cease after the conclusion of the loan tenure and the interest will accrue until repayment. Upon the death of the borrower or when he/she moves out of the house permanently, the loan will be repaid out of the sale proceeds of the mortgaged house,” says the SBI official. In the case of joint borrowers, if one of the borrowers dies, the surviving spouse will continue to get the RML payments and is allowed to stay in the mortgaged house during his/her life-time, subject to other foreclosure clauses. Borrowers also have the option of prepaying the loan without any penalty. “The money received is not taxable in the borrower’s hands. The interest which is charged is accrued to the loan and does not have to be paid off,” informs Aditya Apte, partner at investment advisory firm The Tipping Point. While RML does seem to offer a golden opportunity for the silver-haired population to retain their financial independence even in the evening of their lives, it is yet to gain acceptance. “In India, it is generally accepted that the next generation will inherit the property. Hence, the hesitancy to part with the asset,” explains Mr Kapil Kaul, country head, HelpAge India Foundation. Adds Mr Apte: “A house is an extremely emotional asset created over years and this makes mortgaging it difficult. Besides, the maximum loan amount that one can hope to get under RML is around Rs 1 crore (including interest), which will yield an annuity of nearly Rs 20,000 per month.” The amount seems insufficient – both in terms of meeting regular expenses and the value of the property mortgaged.
In short, while exercising this option may not be recommended in the regular course, it can certainly light up the twilight years when all other alternatives have been exhausted.