Things You Need To Know About Reverse Mortgage Loans

India is one of the world's fastest-growing economies, but the Indian population is ageing gradually. So far, the country has enjoyed a premium attached to having a young workforce. So, most government schemes and initiatives have mainly targeted the youth and worked for their uplift; senior citizens, meanwhile, have had little to benefit from. But, that is not true of the home loan market. India's home loan market has products for all sections of the society – the young, women, traders, Non-Resident Indians (NRIs), professionals, and people belonging to other categories, even senior citizens.

A niche home loan product designed especially for senior citizens is Reverse Mortgage Loan (RML), where lenders extend credit against the mortgage of property.

Makaan IQ tells you the things that you need to know about Reverse Mortgage Loans.

What are Reverse Mortgage Loans?

The RML scheme has been formulated to take care of the needs of the home owners who might require financial support themselves in old age (after the age of 60). Under this scheme, the lender makes payment to the borrower (a senior citizen) against the mortgage of his or her home. A few lenders in the market also consider commercial property for mortgage.

The payment against mortgage is made either in instalments (monthly, quarterly or yearly), in a lump sum amount, or both at a fixed rate of interest.

As opposed to the normal mortgage scheme, in which the equity of the borrower rises over the period of a loan, the borrower's equity declines over time in the case of RML.

How do senior citizens repay their loans?

In the RML scheme, the borrower is not expected to service the loan during his lifetime. Loan recovery occurs after the death of the last surviving borrower, or when he/she leaves the property. The borrower is not expected to make monthly payments towards the sum borrowed. Banks recover the outstanding loan amount by selling the property, if the borrower's heirs refuse to repay the loan (principal amount plus interest).

For what purposes do people apply for RML?

• For upgrade, renovation, extension, improvement or maintenance of their home
• To insure their home
• For medical emergency
• To supplement pension/other sources of income
• Definitely not for speculative purposes

Is there a lower or upper limit on the amount you can borrow under RML?

The amount that can be borrowed under RML varies from Rs 5 lakh to Rs 2 crore (varies from lender to lender).

The revaluation of the property is done after a certain period, and the extent of loan could be revised on the basis of the revalued figure. This means the extent of payment could rise if the value of the property has increased and decline if the value of the property declines.

How is the tenure of RML decided?

The maximum restricted tenure for an RML is 20 years. The tenure for an RML does not indicate a period at the end of which the loan has to be repaid; it indicates the period for which the loan amount is discounted at a given rate of interest for making payments equivalent to the discounted value of the borrower. Simply put, it means the borrower is paid less if the loan tenure is longer, and more if the tenure is shorter.

The loan tenure is fixed on the basis of the age bracket of the borrower.

The primary security for an RML

The lender has primary rights over the mortgaged property against which the RML is financed. The lender's rights take precedence over those of the borrower. The property must have a clear and marketable title. Residual age of the property must be at least 20 years (the tenure of RML).

How much can you borrow?

The loan amount of the RML is based on the principle that the equity of the borrower in the residential property does not at any time during the tenure of the loan fall below 10 per cent.

Two parameters are considered while deciding the RML amount – the age of the applicant, and the assessed value of the property. For instance, for a person who is 60-65 years old, the loan amount that will be funded will be 60 per cent (it may vary) of the assessed value of the property.

What are the eligibility criteria for an RML?

• The applicant must be a senior citizen (above 60 years of age).
• Married couples are eligible to be joint borrowers, with one of them being at least 60 years old, and the other not younger than 55 years (this criterion varies from bank to bank)
• Many lenders consider only residential property for RML
• The residual age of the property must be at least 20 years

Many lenders insist that a residential property considered for mortgage must be the permanent primary residence of the borrower.