Reverse Mortgage Loan (RML)

What is Reverse Mortgage Loan?

A reverse mortgage is a loan that enables senior homeowners, aged 62 and above, to convert part of their home equity into tax-free* income without having to sell their home, give up title to it, or make monthly mortgage payments. The loan only becomes due when the last borrower(s) permanently leaves the home.

A reverse Mortgage Loan is a scheme for senior citizens. It was introduced by National Housing Bank. The announcement of this scheme was made by Govt. in the Union Budget of 2007-08.

What is Mortgage?

A mortgage is a transaction where a mortgagor takes a loan from a mortgagee, against an immovable property as security. Land or land with building/house is the security, that we generally reckon as immovable properties while considering a mortgage transaction.

What is a Reverse Mortgage?

It is a novel loan product under which a senior citizen who is the owner of a house can avail of a lump sum amount or a monthly stream of income against the mortgage of his house, while remaining the owner and occupying the house throughout his lifetime, without repayment or servicing of the loan.

The home owner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves the house.

Why it is called “Reverse”?

In a reverse mortgage, the homeowner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month. Reverse mortgages work much like traditional mortgages but in reverse. Instead of the borrower making a payment to the lender each month, the RM lender pays the borrower.

In a typical mortgage, the equity of the borrower in the mortgaged property increases over a period of time.

While in an RM, the equity of the borrower in the mortgaged property normally decreases over a period of time. Reverse Mortgage loans are also called “rising debt, falling equity” loans. As the amount you owe (your debt) grows larger, your equity (that is, your home’s value minus any debt against it) generally gets smaller.

Advantages of Reverse Mortgage

  • Remain Independent: a reverse mortgage allows you to remain in your home and retain home ownership.

  • No monthly mortgage payments: you need not pay back the reverse mortgage loan nor make any monthly mortgage payments until you permanently move out of the home.

  • Tax-free money: because the money you receive from a reverse mortgage is not considered income, it is tax free. (Pending clarification)

  • Freedom and flexibility: the money you get from a reverse mortgage is yours to use in any way you choose.

Feature of Reverse Mortgage Loan

  • Reverse Mortgage Loan (RML) enables a Senior Citizen i.e. to avail of periodical payments from a lender against the mortgage of his/her house while retaining the ownership and occupation of the house.

  • The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender.

  • RMLs are extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB.

  • The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate.

  • The loan can be provided through monthly/quarterly/half-yearly/ annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three.

  • The maximum period of the loan is 20 years.

  • The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.

  • Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once in every five years.

  • The quantum of loan may undergo revisions based on such reevaluation of property at the discretion of the lender.

  • The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence.

  • The lender will have limited recourse i.e. only to the mortgaged property in respect of the RML extended to the borrower.

  • All reverse mortgage loan products are expected to carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.

  • On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property.

  • The borrower(s)/heir(s) can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

  • The borrower(s) or his/her heirs also have the option of prepaying the loan at any time during the loan tenure or later, without any prepayment levy.

Benefits of Reverse Mortgage Loan

  • Pay off existing liens or mortgages – eliminate monthly obligations
  • Provide additional monthly income for medical expenses and home repair
  • Create a cash reserve for emergencies or special needs
  • Can be used for estate planning and wealth management

FAQ

Who is eligible for Reverse Mortgage Loan?

You will have to be a Senior Citizen of India above 60 years of age who have retired from active work life. Married couples will be eligible as joint borrowers for financial assistance. One should be the owner of a self-acquired, self-occupied residential property (house or flat) located in India. Residential property should be an approved construction, free from any encumbrances and the residual life of the property should be at least 20 years.

How is the appraised value of the property calculated?

The PLI shall determine the Market Value of the residential property through their internal or external approved valuers. PLIs are advised not to reckon expected future increases in property value in determining the amount of RML.

How is the value of loan amount calculated?

The amount of loan will depend on the market value of the residential property, as assessed by the PLI, age of the borrower(s), and prevalent interest rate. As per the NHB guidelines, it may vary between 40% ( for those at 60 years) to 60% (for those at 75 years) of the Assessed Value of Property.

The PLI may consider ensuring that the equity of the borrower in the residential property or Equity to Value Ratio (EVR) does not at any time during the tenor of the loan fall below 10%. The PLIs will need to revalue the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state, etc.

Such revaluation may be done at least once every five years and the quantum of the loan may undergo revisions based on such revaluation of property at the discretion of the lender.

What are the allowed end uses of Reverse Mortgage Loan?

The loan amount can be used for renovation, extension, maintenance/insurance of residential property, medical/emergency expenditure for maintenance of family, supplementing pension/other income, repayment of an existing loan taken for the residential property to be mortgaged and also for meeting any other genuine need of the borrower. But the use of RML for speculative, trading and business purposes is not permitted.

What are the tax implications of RML?

Bank customers want to know whether the monthly RML payments are taxable. Technically they should not be, as the payments are in the nature of a loan, but banks want the IT department to explicitly clarify this point.

Another aspect is, whether the interest accrued on this reverse mortgage loan can be treated at par with that of accrued interest in case of a normal housing loan.

At present, such interest accrued up to the tune of Rs. 1.5 lakh per year can be deducted from the taxable income. Bankers themselves want clarification on another point. The interest accrued on the monthly payments is booked as income, but banks want to pay tax on it only when they recover the money by selling the house after the borrower dies!

In these circumstances, the National Housing Bank has written to the Income Tax department, conveying concerns of banks and their customers on these issues related to the treatment of loans from reverse mortgage arrangements.

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