12/6/12 FAQs on Reverse Mortgage in India - Chartered Accountants India,CA India,CWA,ICAI,CPT,IPCC,PCC,PE

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Discussion > Income Tax > Others > FAQs on Reverse Mortgage in India
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Ash Jain
Chartered
Accountant
[ Scorecard : 555]


Q.1.What is reverse mortgage?
When you buy a house through a home loan, every EMI you pay towards
servicing the loan increases your equity in the house. Once you payoff the loan
in full, your equity in the house is 100 per cent. In reverse mortgage, exactly the
opposite happens. When you pledge your house for reverse mortgage with a
lending institution, your equity in your own house decreases with every
disbursal that the lending institution makes to you.

Q.2 Which institutions offer reverse mortgage as a product in India?
Reverse mortgage as a product is fairly new to India. Dewan Housing Finance
was the first institution in the country to come up with its reverse mortgage
product-Saksham. Since then, most leading lending institutions have come up
with their own reverse mortgage products.
Some of these are State Bank of India, Punjab National Bank, Bank of Baroda,
Central Bank of India, Union Bank of India, LlC Housing Finance, Indian Bank,
Andhra Bank, Corporation Bank and Canara Bank.

Q.3 What is the eligibility criteria for reverse mortgage?
First, Second you need to have 100 per cent equity in your should be more than
60 years of age. If your wife is a co-applicant, she should be above 58.

Q.4 How do I apply for reverse mortgage?
Once you decide to pledge your house for reverse gage, you should ideally go to
the branch of the bank with which you have a banking relationship and fill up
the necessary formprovided the bank offers reverse mortgage. If your bank
does not offer reverse mortgage, then approach the nearest branch of a bank
that does, and fill up the form. You will need to furnish your personal and
financial details: details about The property, your legal heirs, and so on. To
authenticate that you own that the property, you will also need to furnish
property papers and a proof that the house that you are pledging is your
residence.

Q.5 How does the lending institution arrive at the amount that would be
disbursed under the reverse mortgage product?
The qualifying amount of loan will depend on the realisable value of your
property after maintaining a margin. This margin covers the rate of interest on
the loan and any possible fluctuations in the value of the property pledged for
reverse mortgage. The value of the property is evaluated every 3-5 years,
depending on the lender, and this will affect the amount of funds being released
to you as per the payment plan you choose.

Q.6 What are the payment options that lending institutions provide under
reverse mortgage?
The money can be credited into your savings bank account or in a joint account-
with the either or survivor option-in the same bank either on a monthly or
quarterly basis, or as a one-time lump sum payment.

Q.7 What is the rate of interest on the amount that the bank sanctions under
reverse mortgage?
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reverse mortgage?
The rate of interest on the reverse mortgage loan typically varies between 10
per cent and 12 per cent. However, you will not be required to pay this interest.
Once you vacate the premises permanently, or in the event of your death, the
lending institution will give the first option to the legal heirs of the property to
settle the loan. If they are unable to settle the loan, the lending institution will
sell the property and, from its proceeds take its share-principal, i.e., the total
amount disbursed as loan and the interest on it-and give the to the legal heirs.

Q.8 Is there a processing fee?
Yes, There is a processing fee. This typically varies between 0.15 per cent and
1.50 per cent of the loan amount. In some cases, apart from specifying the
percentage of loan amount as processing fee, they also have an upper limit as
to how much they can charge as processing fee.

Q.9 What is the maximum payment tenure that a lending institution offers
under reverse mortgage?
Most reverse mortgage loan products available have a maximum tenure of 15
years, with a minimum tenure of 10 years. However, RML products of central
Bank of India and Bank of Baroda can be extended further, to the advance value
of the property. In case of Central Bank of India, the loan can be further
extended by another five years. Punjab National Bank is the only institution that
offers RML for 20 years.

Q.10 Can I prepay the amount that the lending institution disburses under
reverse mortgage? Is there a pre-payment penalty?
Yes, you can prepay the loan along with the interest any time during the loan
tenure. Typically, there is no pre-payment penalty.

Q.11 Is the rate of interest on the RML and the value of the house fixed for
the entire tenure or are they revised at regular intervals?
Considering that real estate, like any other asset class, passes through cycles
and the cost of funds for lending institutions also keep changing, most lending
institutions have a reset clause in the their respective RMLs. This is to ensure
that at no point during the loan tenure, the loan to value ratio exceeds the
maximum unlock able value of the mortgaged property. However, this reset
clause varies across institutions. While most lending institutions have a reset
clause of five years, Central Bank of India and Dewan Housing Finance have a
reset clause of three years.
So, after the scheduled period, both the value of the house as well as the rate
of interest will be re-evalued and necessary adjustments will be made in your
monthly payments.

Q.12 What if I outlive the tenure? Can I still stay in my house?
In case you outlive your loan tenure, you will continue to live in your house.
However, the lending institution may stop the monthly payments to you if the
unlock able value of the property has already been exhausted.

Q.13 When will the lending institution take my house?
After your death, or if you have permanently moved out of the property, the
bank will first give your legal heirs an option to settle the loan. In case of a joint
loan, it will become due for recovery and payable six months after death of the
last surviving spouse,

Q.14 How does the lending institution recover the money that it has given
me under reverse mortgage?
If your legal heirs cannot settle the reverse mortgage loan, then the property
will be sold off and after realizing its money (total advances and the
accumulated interest), the bank will pass on any surplus to your legal heirs.

Q.15When does it make sense to opt for reverse mortgage?
Reverse mortgage should ideally be used to augment ones income in the
golden days in the retirement years. It should ideally be the last resort to make
good of the shortfall in funds in your retirement years.

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