Reverse Mortgage is an option available to senior citizens to meet their expenses from the value of the homes. In other words, reverse mortgage ‘gradually unlocks’ the value of the home. A large proportion of the savings of senior citizens is embedded in the house they live in, depriving them of this support for their expenses and day-to-day needs. Reverse Mortgage helps solve this problem.
What is reverse mortgage?
In Reverse Mortgage, a bank lends money to a senior citizen against the value of his or her home. The loan does not need to be repaid by the senior citizen in his or her lifetime unless the house is sold by the senior citizen. The loan becomes due after the death of the senior citizen. The heirs of the estate can either repay the loan from their funds or sell the house and repay the loans from the proceeds. The interest rate on the loan becomes income for the senior citizen. Such income is exempt from income tax.
Reverse Mortgage is only available to resident Indians above the age of 60. Married couples are allowed to apply together for the reverse mortgage. Banks usually lend only up to a percentage of the assessed value of the home. Union Bank has placed a maximum lending limit of 90% of the property’s value. Apart from the percentage limit, banks also lay down overall loan limits of Rs 50 lakh to Rs 2 crore as shown in the table below.
The reverse mortgage amount can either be disbursed as a lump sum or periodic payments. Income tax rules lay down that more than 50% of the loan amount cannot be disbursed as a lump-sum.
|Bank||Maximum Loan||Tenure (years)||Interest||Processing Fee|
|SBI||1 crore||10-15||11%||0.5% of loan|
|IDBI Bank||2 crore max||20 (max)||N/A||N/A|
|Union Bank||1 crore||10-20||12.15%||0.5%, max Rs 10,000|
|Corporation Bank||50 lakh||N/A||N/A||N/A|
Other conditions levied by banks
Banks usually make property insurance mandatory for availing this type of loan. They sometimes also stipulate a maximum age of the property (30 years for Corporation Bank). IDBI Banks stipulates that the loan will become due if the borrower moves permanently to an old age home or institution or the house of a relative.
Reverse Mortgage is a useful method of providing for retirement income if a large part of your savings are invested in your house. Its appeal becomes stronger if your children are no longer financially dependent on you.