Retiring with a Reverse Mortgage - Is it Good For You?
Nov 16, 2010

Author: PersonalFN Content & Research Team

Retiring with a Reverse Mortgage – Is it Good For You?

To save for your retirement, you need to first know how much money you will be spending in your retirement years, and you need to also estimate life expectancy. Both of these can be quite tricky. If you are already in your golden years and find that your existing wealth corpus would benefit from some surplus income, then reverse mortgage could be a good option for you.

In India, the life expectancy has been steadily rising over the past years. While on one hand the life expectancy is increasing, on the other, medical costs are spiraling. As a senior citizen, you would require a steady stream of income which you can depend on to fund your living expenses. Your children may be living abroad and perhaps have no plans to return to India. You may also not want to be dependent on them for income.

For most senior citizens, the house you live in is the largest component of your wealth. A Reverse mortgage on your house is one way to have a steady stream of income and continue to maintain your lifestyle.

Let us start at the beginning.

What is a Reverse Mortgage? To put it simply, a Reverse Mortgage is the exact opposite of a standard home loan.

Here, instead of taking a loan to buy a home and paying the EMIs to the bank / financial institution, you are receiving EMIs, and the bank is buying your home from you. A Reverse Mortgage will therefore enable you as a senior citizen, to get a regular flow of income from the lender (the bank or a financial institution) against your home. You as the borrower (i.e. the person pledging his home), will continue to live in your home till the end of your life and you will receive regular payments from the lender, depending on the value of your home.

How does a Reverse Mortgage Work?

When you pledge your home to the bank, the bank first assesses (using an independent expert, or in-house expertise) the value of your home. Depending on the value arrived at, and also depending on your age, the bank then disburses a certain loan amount to you by way of either a lumpsum, or by way of periodic payments for certain tenure. Effectively, the bank is buying your home from you a little at a time. You will remain the owner, and continue to live in the home till your lifetime. Also, since you continue to own your home, you are financially responsible for its upkeep and maintenance.

Things you Need to Know About Reverse Mortgage

The RBI has established certain guidelines for a Reverse Mortgage. These are as follows:

The maximum loan you can receive is up to 60% of the value of your home.
The loan tenure is capped at 20 years, however some banks will not go above 15 years which is opening the reverse mortgage product to criticism. Please note that this does not mean that once the loan tenure is over, you have to vacate the home. It only means that your periodic payments will cease once the loan tenure is over.
You can choose to receive the payment in a lump sum (in one or more tranches) or you can choose to receive payment periodically, or as a committed line of credit from the financial institution / bank.
If you opt to take the money as a lump sum, then the loan amount is capped at 50% of the value of your home. However some banks also choose to cap this at 15 lakhs, so be sure to check all these details with the bank / financial institution.
If you choose to receive periodic payments, you can receive then in a monthly, quarterly, half yearly or yearly manner.
If you choose to take it as a committed line of credit, you can receive money as and when you require, during the tenure of the loan, based on terms decided between you and the bank prior to finalizing the loan.
Your property will be re-valued at least once in 5 years, and based on the revaluation, your lender has the option (but is so far not obligated) to change (read, increase) the periodic payments you receive.
This is not applicable to commercial properties. Reverse Mortgage Loans apply only to residential properties that are self occupied by the borrower i.e. you, and the house that you live in. This is known as your ‘permanent primary residence’.

How is a Reverse Mortgage Loan settled and what is the income taxability?

Let us address taxability first.
According to The Income Tax Act, and also according to the guidelines issued by the National Housing Bank, any income received (whether lump sum or annuity) from a reverse mortgage loan is fully exempt from tax.
However, In March this year, the National Housing Bank Chairman and MD Mr. S. Sridhar, made a representation to the Government of India to appeal against the existing taxability of these payments.
Hence this appears to be a grey area. The National Housing Bank was not contactable to provide clarity on this matter.

Coming to how the loan is settled, once the loan tenure is over, and if you choose to move out of the property, then the bank can sell the property to recover its loan amount. This is how the bank / institution settles the loan.
At the time of settlement, the first offer to buy the home is given to your next of kin. If they wish, they can buy the home by simply repaying the loan amount.

At that time, provided the property is sold for more than the loan amount (which will likely be the case), then the surplus amount over and above the loan amount, is paid to you / your legal heirs / next of kin. When you receive this surplus amount, you will be liable to pay capital gains tax. If the surplus amount is received by your legal heirs, they will be liable to pay the capital gains tax.

If the sale amount of the home is lower than the initial loan amount (which could only be the case if the original estimation was not in line with future actual real estate market movement) then whatever loss is there, is borne by the bank / financial institution itself.

Are you eligible for a Reverse Mortgage Loan?

Checking eligibility is simple. If you are a home owner, above the age of 60 years, owning a self acquired, self occupied home or flat in India, with a clear title, you are eligible for a reverse mortgage loan.

The life of the property should be at least 20 years, and the property title should be free of any encumbrances.

Also note that if you are your spouse so wish, you can both apply for the loan together as co-owners. In this case, if one spouse dies, the second spouse continues to receive periodic payments. Whether applying for a reverse mortgage loan singly or jointly, the bank will only sell the house after the lifetime of the last surviving spouse, or if the house is no longer lived in.

The only clause here is that the co-owner should be at least 55 years of age. Some banks stipulate that the co-owner should be at least 58 years of age. Be sure to know all the details of the loan offered by the institution you are speaking with before you finalize.

Reverse Mortgage in India

Though this scheme was introduced by the RBI back in 2007, it has still not gained much of a following.

This is due to a number of reasons, the most glaring of which is the fact that there appears to not be much clarity on this product.
The National Housing Bank (the RBI owned agency promoting and supporting all housing finance institutions in India) has issued a set of guidelines, which are not being uniformly followed by the institutions offering reverse mortgage loans.

A brief comparison of salient features of reverse mortgage loans offered by key public sector banks yielded the following details:

BANK	PNB	BOB	SBI	CENTRAL BANK
MAXIMUM LOAN AMOUNT	1 crore	1 crore	1 crore	1 crore
MAXIMUM LOAN TENURE	20 years	15 years (subject to extension)	15 years (if you are between 58 and 68 years) and 10 years (if you are above 68 years of age)	20 years, extendable up to lifetime of the homeowner
LUMP SUM PAYMENT OPTION	Selectively available	Available	Available	Available
MAXIMUM LUMP SUM AMOUNT	15 lakhs	No cap specified	50% of the loan, maximum 15 lakhs	25% of Loan, maximum 15 lakhs

Secondly, the product itself has not been marketed or promoted, and hence awareness that such a scheme even exists is fairly lower than was expected.

Third is the financial usefulness of the scheme. With caps on loan amount, loan tenure, lump sum payable, and no guarantee of beneficial revisions in periodic payments upon revaluation of the home, the product might appear unattractive.

Last but not least, India as a country is one which places a certain level of importance on things such as providing for one’s parents. This automatically reduces the available audience for the product. Also, parents might not wish to ‘mortgage away’ the inheritance of their children.

As a financial tool, reverse mortgage has some way to go in terms of fine tuning the details, before it becomes a fully beneficial product for the elderly, and not just a compromise to augment their income.

However, that being said, it does augment one’s income, and hence can certainly be looked into, if you find yourself in your golden years. This product can help to maintain your lifestyle at a period of life where fixed income is necessary, and hence can certainly be looked into.