What is Reverse Mortgage?
A reverse mortgage is the exact opposite of a regular mortgage or a House Loan. In a typical home loan, where one has to pay monthly installments to the bank for the lump-sum loan they took to buy the house, in a reverse mortgage one first gets the loan in monthly instalments and has to pay back the loan as a lump-sum at the end of the loan tenure.
The reverse mortgage concept though quite popular in the West for long, was introduced in India only in 2007 and is yet to take off as many people are still unaware of such a scheme or fail to understand the concept behind it.
Reverse mortgage is available only to senior citizens and to be eligible one has to be at least 60 years old and have a house in their name with no outstanding loans on it. This house is pledged as collateral for the loan and one can decide if the loan given out in installments is to be allotted monthly, quarterly or annually. The loan amount is pre-fixed to a maximum of 60% of the asset value of the pledged house or Rs 50 Lakhs, whichever is lesser. Also, the loan tenure on a reverse mortgage is typically 15 years and a minimum of 10 years. Currently in India, only Punjab National Bank (PNB) offers reverse mortgage tenure of 20 years.
Below are a few quick features of the reverse mortgage scheme:
- Applicable only to senior citizens aged 60 or above
- Loan amount can be maximum up to 60% of the asset value of the residential property
- The tenure for the loan is typically 15 years
- Regular home loan interest rates are applicable i.e. 12-14% and depending on market conditions one may go for floating or fixed interest rates
Another important feature of the reverse mortgage is that since the monthly funds that you get from the bank is technically a loan and not actually an income, this money is tax free.
In the event, that the person outlives the loan tenure of 15 years, though the bank can stop further payments, the person may continue to live in the house as long as they want. When the borrower passes away, the ownership of the house passes on to the heirs as per their standing will. The heirs(s) can either keep the house by settling the loan plus the interest accrued to the bank or has the option of selling it and uses the proceedings to pay back the loan to the bank.