In India, people who have retired from jobs constitute a good portion of the total population. Generally, retired people have to depend upon their earning family members for a living. This way, without an adequate source of income for themselves, they may not be able to live a financially independent life. However, this year’s budget provided a new lease of life for the senior citizens in our country, by introducing the Reverse Mortgage Loan (RML) scheme.
Subsequently, the NHB, a subsidiary of the Reserve Bank of India (RBI) and the apex regulatory authority for the housing finance sector, drafted the norms for this scheme. Upon receiving feedback from various stakeholders on the draft guidelines, the NHB has now released the final set of guidelines on the RML scheme.
A reverse mortgage is just the opposite of a regular mortgage. A regular mortgage implies taking a home loan, where the home is mortgaged, or in other words, is kept as security, with the lender, until the time that the loan is fully repaid. In a reverse mortgage, a senior citizen, who owns a house, can mortgage it with a lender and in turn, gets a periodic payment from the lender during his/her lifetime. A person can continue to occupy the home, which is mortgaged, during his lifetime.
Several financial institutions, such as Punjab National Bank (PNB), Bank of Baroda (BoB) and ICICI Bank have announced the RML scheme for senior citizens. Other banks like Corporation Bank, Oriental Bank of Commerce and Allahabad Bank are following suit and soon launching similar products.
Lending institutions reserve their discretion while offering these loans. However, the nodal agency has formulated a detailed set of operational guidelines for lenders to refer to while giving out loans under this scheme. The guidelines for the RML are as follows:
Under this scheme, a loan can be availed of, for a maximum period of 15 years. If the owner or the spouse outlives the loan tenure, he/she can continue to live in the house. They, however, will not get the reverse mortgage payments from the lender.
If the loan is availed singly then the borrower should be a senior citizen of India and above the age of 60. Married couples are eligible as joint borrowers for this loan. Further, if a joint loan is taken with the spouse, as long as one of the partners is over 60 years old, the loan can be granted even if his/her spouse is below the age of 60.
The final norms stipulate that a RML will be restricted to only a self-acquired and self-occupied residential property, owned by the senior citizen, and which has a residual life of at least 20 years.
The guidelines specify that the amount granted by way of loan under this scheme will depend on three factors – the market value of the property as derived by the lender, the age of the borrower and lastly, the prevalent interest rate on the loan.
Borrowers will not be liable to pay any charges or penalty if they make prepayment on the loan.
Lending institutions need to remain selective in giving out such loans and they are required to have an internal policy framework in place as far as eligibility of the loan and end-use norms are concerned. Also, all the terms and conditions on RMLs need to be conveyed upfront to borrowers.
The quantum of loan will depend upon the age of the borrower and can range between 40 to 60 per cent of the assessed value of the property. The higher the age of the senior citizen, the higher will be the loan amount.
The interest rate on the reverse mortgage will be determined by the financer based on the risk perception and loan pricing policy, among others. Fixed and floating rate of interest may be offered, subject to a transparent disclosure of the terms and conditions to the borrower.
Under this scheme, the lender needs to re-value the house at least once in every five years and the loan amount can undergo a revision based on this assessment.
The guidelines also state that the money received under reverse mortgage can be utilized for certain specific needs like maintenance of the home, to supplement pension or other income, for medical and emergency needs, to pay off debts related to your home and a few other genuine needs.
The payments that received under this scheme can either be monthly, quarterly, half yearly or annually. A lump sum payment can also be opted for but this will be limited to special requirements such as a medical emergency, maintenance / renovation of the house, etc.
The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
A senior citizen who wants to have access to a regular income to meet his day-to-day needs, then the reverse mortgage scheme is just the right one.