REVERSE MORTGAGE

A Reverse Mortgage is meant for asset rich but cash poor senior citizens. A reverse mortgage is a loan available to homeowners, 60 year or older, that allows them to convert part of the equity in their homes into cash. A reverse mortgage is a type of mortgage in which an owner of a house can borrow money against the value of his home. The owner can receive money in the form of fixed monthly payment or a line of credit.

In India it is the National Housing Bank (NHB), who formulated the basic structure of this financial product. In a regular mortgage, the borrower takes loan from the bank and gives his property to the bank against collateral. Thereafter, he returns the loan amount by paying the principal and interest amount to the bank at regular intervals, say monthly.

However, reverse mortgage works in a different way. Here, the homeowner gives his property to the bank and receives payment based on the percentage of the value of the home. Payment may be received either in lumpsum cash, regular monthly cash payment, a line of credit (where the homeowner decides when and how much to borrow), or a combination of these options.

Further, throughout the life of the reverse mortgage, one can keep title to his home, which acts as a collateral for the loan.

The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be.

Now, let us understand who can opt for Reverse Mortgage. Only a senior citizen (60 years or above) who owns a residential property can opt for this product. If a couple is opting for the loan jointly, one of them should be a senior citizen and the other at least 55 years old. Further, while calculating the amount, the bank considers the following factors:

(i) Age, 

(ii) Value of the property, 

(iii) Current interest rates and the specific plan chosen. 

(iv) Also, the residual life of the property should be at least 20 years. 

The maximum monthly payment under Reverse Mortgage Loan (RML) is capped at Rs.50,000, and the maximum lump sum payment will be 50% of the total eligible amount of loan with a cap of Rs.15 lakh. Moreover, the borrower will have to continue paying all the taxes related to the house, insure it and take proper maintenance of the property. 

The valuation of property is generally done at periodic intervals by the bank. Currently, big nationalized banks and some private banks offer reverse mortgage loans. Interest rate on these loans is usually in the range of 2.75-3% above the base rate. 

There are two variants of RML available 

(i) Regular RML 

(ii) and, reverse mortgage loan-enabled annuity (RMLeA). 

Regular RML 

In case of regular RML, the homeowner will either get a lump sum amount or instalments depending on its frequency. It is similar to loan against property, the difference being that in RML, there is no need to pay back the money at the end of the tenure. For example, if the tenure of the loan is 20 years, the bank will stop paying money at the end of the tenure. There is no need to repay the loan amount during the lifetime or until one lives in the house. 

RMLeA is a reverse mortgage backed with annuities and hence it works like a pension product that pays for lifetime. If you opt for RMLeA, you will get the money from a life insurer as the lender gives the loan amount to an insurance company. The insurer then annuitises the corpus and gives you pension money for the rest of your life. 

RMLeA and its superiority to RML 

In a regular RML, lender will make a payout till the end of the tenure. 

In RMLeA, the actual loan to be disbursed is comparatively lower at 60-75% depending on the borrower’s age. Here, the lender makes a one-time payment to an insurer. The insurer works out a monthly payment based on actuarial calculation that it will pay for life. Generally, annuities are offered at an interest rate of 6% a year. The payout in RMLeA is much higher than RML.

Risks associated with Reverse Mortgage 

The main risks associated with Reverse Mortgage for lenders are as follows: 

(1) If the person lives for longer life, then for bank it would be quite difficult to source long term funds to match with asset’s value. 

(2) Drop in the value of assets is another major risk. 

(3) Interest Rate Risk is also a major risk as spread may become narrow. 

(4) Legal risk is also attached with property as property may not be put to sale due to any legal reasons. 

Reasons for failure of Reverse Mortgage to takeoff in India 

(1) Tendency of Indians to treat their property as family heritage and the property is sold only as a last resort. 

(2) Property owners also seen as an important people in the society. 

(3) Senior Citizens who own property are assured of love and respect from their kins. 

(4) There is no guarantee of life time income which most senior citizens consider in their retired life. 

(5) As soon the term of the loan is over, the liability of repayment arises. Therefore, if someone who sustained the entire term of say, 20 years, he runs the risk of losing the house if he is not able to repay the loan. 

(6) There is lack of awareness among the people regarding Reverse Mortgage Loans.