Sandip and Smita Palit have a picturesque duplex in Salt Lake. Sandip used most of his retirement benefits to build this house, while Smita, who will retire this year from her bank job, had taken a small loan.

The Palits love their home and cherish their days here. But Sandip is sometimes uneasy when he thinks of his finances. He wishes he had kept some of his savings to take care of any medical emergencies or other major expenses.

Reverse mortgage can solve Sandip’s problems.

A reverse mortgage is a loan available to seniors as a lump sum or multiple payments for a maximum of 20 years with a house as colateral.

And if a plan by the National Housing Bank (NHB) works out, reverse mortgage will become even more attractive.

The NHB is working with the Life Insurance Corporation to come up with an annuity product so that a reverse mortgage loan can be extended to cover a borrower’s lifetime.

In such a case, a borrower remains the owner of a house and need not service the loan during his lifetime as long as the property is used as a primary residence. But till such a time when reverse mortgage becomes an annuity product, people like Sandip can take heart from the existing scheme.

Action plan

Suppose you have taken a loan to buy a house. While you have contributed only 15 per cent equity towards buying the house, the remaining 85 per cent is owned by the home loan provider, that is the bank.

By the time you retire, you would have repaid the loan and own 100 per cent equity in the property. You can then take a loan against it via the reverse mortgage route and meet your expenses post retirement.

A reverse mortgage loan is available for a maximum period of 20 years. If the borrower survives the loan tenure, the periodic payments under the reverse mortgage scheme will stop. But interest will continue to accrue until the loan is repaid. If a borrower dies or moves out of the house permanently, the loan will be repaid out of the sale proceeds of the mortgaged house.

After the death of the borrower, the heir(s) can own the property by repaying the loan plus accrued interest to the lender bank. Otherwise, the bank will auction the property to realise the dues.

In the case of a loan for purchasing a house, the value of the property will determine the maximum amount a borrower can get. In reverse mortgage, the loan-to-property-value ratio is always less than 100, that is, your maximum loan eligibility will always be less than the value of the property.

For a home loan, the lender bank or housing finance institution lends a lump sum amount to a borrower and the buyer repays the principal and the interest at a specified rate in equated monthly instalments (EMIs). The EMI amount is determined by the loan tenure and the rate of interest.

In a reverse mortgage, instead of the owner making the mortgage payments, the lender bank pays the borrower. A borrower can choose to receive the payments as monthly, quarterly or annual instalments or as a lump sum.

However, the payment in the case of reverse mortgage will also depend on the age of the borrower and his life expectancy in addition to the rate of interest and the period of payments. A 60-year-old borrower will, thus, get less monthly payment than an 80-year-old homeowner for the same property value.

The reverse mortgage payments are tax-free in the hands of the borrower. Principal and interest repayments in a home loan also enjoy tax reliefs under Section 80C and Section 24, respectively. These tax benefits make a house the best asset for an individual.

Bank lethargy

Despite all these benefits, reverse mortgage has not gained much momentum in the country. So far, banks and housing finance companies have lent only Rs 531 crore under the scheme.

With interest rates coming down, the payment quantum under reverse mortgage will increase. The NHB hopes that reverse mortgage loans will find favour among borrowers once the interest rates are reduced.

Banks themselves have not been very enthusiastic about providing a boost to their reverse mortgage portfolios. This is because of many reasons.

First, they will have to take a call on future interest rates for a long term (20 years).

Second, a lender bank has a limited recourse to realise the loan — to auction the mortgaged property in the case of non-repayment by the borrower or the heir(s) at the end of the tenure. Auctions of such mortgaged properties would be like distress sales for banks.

It is also feared that auctions of residential properties by many banks would pull down the market value of properties. If the auction value of a property is less than the amount of loan sanctioned, the bank will have to bear the loss.

Third, the scope of a house insurance is very low in the country. If a house catches fire or gets destroyed in an earthquake or flood after it is mortgaged, the lender bank will have to bear the loss.

Fourth, banks are not very clear about the prudential requirements, such as provisioning for non-performing assets or risk weightage in reverse mortgage loans.

Fifth, the end-use of the payments received by borrowers is restricted. According to NHB guidelines, the payments can be used for the following purposes:

• Upgradation, renovation and extension of residential property
• For uses associated with home improvement, maintenance/insurance of residential property
• Medical, emergency expenditure for maintenance of family
• For supplementing pension/other income
• Repayment of an existing loan taken for the residential property to be mortgaged
• Meeting any other genuine need

Use of a reverse mortgage loan for speculative trading and business purposes is not permitted. These restrictions have deterred many borrowers from opting for reverse mortgage.