This famous anecdote spotlights the importance of reverse mortgage for pensioners. A reverse mortgage is a special type of loan that allows senior citizens to mortgage their homes without having to make any loan repayments and thus helps them tide over financial difficulties.
In India, a senior citizen can ink a similar deal with banks, albeit with some tweaks. Considering that bank fixed deposit rates are going down and healthcare expenses rising, financial experts see reverse mortgage a good option for retirees. The homeowners get a fixed monthly payment for letting the banks auction off their property after their deaths to recover the loan dues. Any remaining amount is passed on to their legal heirs.
How reverse mortgage works
A senior citizen above the age of 60 and with a residential property in their name can apply for a reverse mortgage loan. In the case of couples, the spouse should be at least 55 years old.
Once the person decides to take the loan, the applicant would have to submit a list of documents, including proof of the person’s identity and the title deed of the house. The applicant needs to make sure that there is no property dispute and that it is not agricultural land or commercial property.
After the documents are verified, the bank will appoint a valuer to assess the market value of the house. This is done to know how much the banks can lend against the property. Banks typically offer up to 80% of the house value as a loan and maintain the rest as a safety net. For instance, if the house is worth ₹1 crore, then the maximum loan amount is capped at ₹80 lakh.
It is important to note that the loan amount will be disbursed as monthly payments. In case of a medical emergency or other such cases, most banks offer lump sum payments of up to 50% (capped at ₹15 lakh) of the total loan amount. This amount gets deducted from the total loan amount. The loan amount ( ₹80 lakh in the above example) comprises both the principal and interest.
After every five years, the property is revalued by the bank to reflect any change in its worth. If the house value has increased, the loan amount is usually readjusted upwards. If the value has gone down due to some reason such as wear and tear, it can also be adjusted downwards.
The loan amount is typically paid over 15 years but some banks have the option of spreading it over 20 years, The monthly income will stop after the loan tenure is over but there is no need for the borrower to repay this loan in their lifetime. Also, only when the couple die, can the banks auction the property and recover the loan. Any remaining amount from the sale proceeds is passed on to the legal heirs. The banks will give legal heirs of the deceased the option to pay off the loan and take possession of the house before putting it for auction. Note that the monthly payment by the bank (principal and interest) is not subject to income tax.
Another important point to note is that less than half the total loan amount will be actually disbursed in the form of monthly payments. This is because the total loan amount also includes the interest portion to be paid over the years. (see graphic).
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Why is it not popular?
A few factors make reverse mortgages not so attractive for both senior citizens and the banks. Mint visited a few public sector bank branches to find out the reasons.
One has to do with Indian traditions. Unlike in the Western world, most people in India prefer to pass on their assets, a sort of legacy, to the next generation.
Another reason is that most banks don’t offer reverse mortgages on properties that are more than 40 years old. This is because most old properties may not be structurally sound and would be difficult to dispose of. This means most ancestral properties may not be eligible for reverse mortgages.
The third reason is a clause in the loan agreement that demands the borrowers to reside in the mortgaged house. If they don’t stay there for more than 12 months, banks can take possession of the property. This creates a physiological barrier for many senior citizens who may want to stay with their children when any unforeseen situation arises.
The banks also require the borrower to mandatorily take insurance for both the property and life of the mortgagers, the proceeds of which can be used for the loan repayment. However such premiums in this case, considering the age of the insured, is typically cost-prohibitive.
Yet another reason is that most banks offer a maximum of ₹1 crore loan for reverse mortgages. State Bank of India offers up to ₹2 crore for properties located in metros and ₹1.5 crore in other places. However, big homes in metros could typically exceed that value. Financial experts say that, in such cases, it makes sense to sell the property and move into a smaller apartment and utilize the balance amount for their needs after purchasing a new house.
Banks have their own reasons for not promoting reverse mortgage loans, despite this getting them almost 2% more interest than housing loans.
First is the hassle involved in selling the house to recover the dues. They have to spend on issuing notices to legal heirs before taking possession. There could also be legal trouble if the deceased couple will the house to people other than the legal heirs named in the bank loan documents.
Banks are also wary that it would be difficult to find buyers for the property even if all other issues are resolved.This is true in cases where the property is old. Most banks don’t offer housing loans if the property is more than 25 years old. Another concern is the longevity of borrowers. In such cases, the building can become decrepit and it will be difficult to auction it off. Thus, banks could run the risk of not being able to recover their dues.
Is there a solution?
Reverse mortgages work for a subset of senior citizens—those without any dependents or those whose children are financially independent and who do not need to inherit property. The property should not be older than 40 years and the value of the house should not be significantly more than ₹1 crore ( ₹2 crore if it is located a metro).
Retirees who want to opt for the scheme should take into account how much money they will receive and future expenses they are expected to incur and accordingly plan their finances. Senior citizens should also remember that while the monthly payments are fixed till the property valuation happens, which is done once in five years, their expenses are bound to be higher due to inflation. Financial experts say it is better to consult an investment adviser before taking any decision on reverse mortgage.