What is a reverse mortgage?
A reverse mortgage is a loan against property and is the opposite of a regular mortgage. Here, the bank pays a sum against a property asset – be it lump sum, or periodic payouts.
Retired citizens whose net worth is locked up in a self-acquired and self-occupied house benefit from a reverse mortgage, especially if they find their expenses exceeding their post-retirement income. SBI offers this option to applicants who are at least 60 years of age. The tenure of the loan is about 10-15 years depending on the age of the applicant. SBI says on its website that the borrower is not expected to service the loan during her or his lifetime.
Bajaj Finserv says on its website that the lender’s margin is 20%. So, if the house is valued at ₹1 crore, loan eligibility is ₹80 lakh. It adds, “Unlike a mortgage advance, a reverse mortgage loan does not create an immediate liability on borrowers. Lenders thus initiate loan recovery only after the borrower permanently ceases to reside in the property or decides to sell it, or on his/her demise.”
Ancestral property does not qualify for a reverse mortgage.
How does the applicant benefit?
The applicant and spouse are able to realise the value of their house while using it as residence during their lifetimes. Assume that value of the loan is ₹75 lakh; if the applicant decides on an annuity payment then the bank pays out a certain percentage of the loan value over a specific tenure. Often the lender pays 50% at one go and the rest is disbursed as periodic payments. Payments received by senior citizens are also exempt from tax.
If the market value of the asset rises in the interim, the borrower may apply for an increase in payout. Lenders typically protect against a dip in value of the asset by arriving at a ‘forced sale value’ at the beginning. If the decline is stark, they may negotiate for lower payouts or shorter tenures.
Banks generally do not ask for additional collateral. After the demise of the applicant and the spouse, the lender seeks to encash the mortgage, and in the absence of a legal heir settling the loan, auctions the property. Any excess from the proceeds realised via the sale is handed over to the legal heir.
Can the applicant claim back the asset from the lender?
Yes, by repaying the loan in full. If the applicant is alive after the tenure ends, he/she can continue to reside in the property but interest continues to accrue on payouts made. Bajaj Finserv says, “Interest rates on reverse mortgage advances are usually marginally higher than rates applicable to mortgage advances such as home loans.” Borrowers can choose between fixed and floating options.
It is true that in theory, reverse mortgages help borrowers live off their asset and with an assured periodic or lump sum payment without hassles of living in rental accommodation. But, on the sentiment side, senior citizens in India are loathe to writing away assets that are originally intended to be inherited by the next generation. Even if applicants prefer a reverse mortgage, resistance may be expected from the next generation which expects to inherit the property. That’s probably one reason why the concept has not taken off in India. Often, senior citizens, unable to get a loan against property because they may not be able to show proof of ability to pay back a loan, opt for a reverse mortgage, get a lump sum for a particular expense. In 2-3 years, they are able to close such a mortgage and redeem their property. Another reason for poor offtake could be lack of awareness.
One thing applicants must be wary of is that reverse mortgages tend to have high origination costs that become part of the loan balance.