REVERSE MORTGAGE

Parents spend their prime youth on their children by sacrificing their personal effects, just to see them in clover. With the advent of nuclear family, children settle in distant places to further their prospects leaving their parents to fend for themselves. Some of them land up in old age homes after selling their house as their income from retirement benefits does not cover the cost of living and they find it difficult to meet both ends. To ameliorate their problems the government has decided to bring into effect the scheme of Reverse mortgage which is prevalent in US, Canada and U.K. Though reverse mortgage is a new concept in India its introduction will supplement the pension and other incomes of retired people so as to ensure a reasonable standard of living.
Reverse Mortgage is the opposite of a normal mortgage. In a normal mortgage the borrower is granted loan for construction / purchase of a residential or commercial building free of encumbrances and the said building is mortgaged to the Bank as security for the loan availed by the borrower. In the case of a reverse mortgage the owned residential property of the borrower which is free from all encumbrances is mortgaged to the Bank as security for the loan granted to the borrower.
The loan granted will be based on the value of property.
The salient features of reverse mortgage is as follows :
The borrower must have completed 60 years of age and must have retired from service.
The mortgage pertains to only residential property owned by the borrower.
The residential property should be self acquired and not ancestral.
The prospective borrower should live in the house offered for mortgage and it should be his / her permanent primary residence.
Regarding the mode of disbursal of the mortgage loan, the borrower has the choice of any of the following options.
a) Lump sum loan
b) Fixed monthly installment
c) Line of Credit
d) Combination of all the options
The residential property should be free from all encumbrances and it must be an approved construction.
Dewan Housing Finance Corporation Lt. (DHFL) is the first finance company in India to introduce reverse mortgage scheme for senior citizens. The scheme is so designed to benefit the senior citizens after their retirement from service. The scheme supplements their pension and other income.
Based on the estimated value of the residential property DHFL will grant loan to the borrower at 12% interest. The loan to value ratio will be 50%. The disbursal of the loan will be in fixed monthly installment for a period of 15 years. In other words the tenure of the loan will be 15 years. However if the borrower out lives the tenure of the loan, the mortgage can be renewed six months before the end of the tenure. The mode of construction and the life of the property will be the basis for valuation of the property.
The finance company permits the borrower and his spouse to live in the house as long as they are alive irrespective of the expiry of the tenure period of 15 years. The loan need not be repaid by the borrower during his life time. However after the expiry of 15 years the payment of fixed monthly installment to the borrower will be stopped. If one of the applicants expires the DHFL would sell the house and the sale proceeds will be appropriated towards the outstanding loan and interest. The surplus amount will be paid to the legal heirs of the borrower. The legal heirs have the option to repossess the property after the demise of the borrower, by repaying the loan and interest. The scheme is presently introduced in Bombay and expected to be launched in other cities as well.
Punjab National Bank is the first nationalised Bank to launch reverse mortgage scheme. The reverse mortgage facility is offered to senior citizens.
As per the scheme the borrower is entitled for a maximum loan of Rupees One Crore against his property mortgaged to the Bank. The tenure of the loan is 20 years and carries an interest of 10% per annum. All other conditions of a reverse mortgage are applicable to the loan. Since the reverse mortgage is still in its infancy there appears to be some ambiguity in its operation. At the insistence of the government the National Housing Board (N.H.B.) which is the apex body has drafted guidelines to be followed by all Banks and housing finance companies in respect of reverse mortgage scheme. The guidelines as follows ensures uniformity in the procedures for disbursal of the loan.
The fixed monthly installment payable to the borrower will be subject to upward revision on revaluation of the mortgaged property by the Banks and finance companies once in every five years. This is to ensure that the borrower gets the benefit of appreciated value of his property.
The loans will be given to borrowers who have a clear and marketable title to their property. The rule applies not only to houses but also to flats. If the property offered to the Bank / finance company as security for reverse mortgage is inherited property then all the claimants will give their consent in writing and same will be subject to legal scrutiny so as to ensure that the title to the property is clear and marketable. The borrower should be staying in the house proposed to be mortgaged. Mortgage of house by Power of Attorney holder is not acceptable. The quantum of loan to be disbursed to senior citizens depends on the age of the borrower. Senior citizens between 60 and 70 years of age are eligible for loan upto 45% of the value of the property. It is enhanced to 50% for 71-75 age group and 55% for 76-80 group.
The loan is not required to be repaid by the borrower. The Bank / HFC will recover the loan with interest on the demise of the borrower (owner of property) or on expiry of the mortgaged period by selling the property. The surplus amount will be given to the owner or his legal heirs. The owner has the option to repay the loan before expiry of the loan period. The tenure of the loan will be 15 years. In this scheme spouses will be the joint borrowers. In the event of the demise of borrower the spouse can continue to live in the house and get monthly payment until his / her death. In the event of the borrower surviving beyond the tenure period of 15 years, the Bank / HFC will stop payment of the monthly installment to the borrower and the maintenance of the house would be borrower's responsibility. On the death of the surviving borrower the mortgaged property will be sold by the Bank / finance institution and the outstanding loan amount with interest will be recovered from the sale proceeds. The surplus amount will be paid to the legal heirs. However the legal heirs can reposses the property after settling the Bank's / HFC's dues. The borrower has also the option to repay the loan before the expiry of the mortgaged period. The legal heirs who have been staying in the mortgaged properly will have to vacate within a reasonable period after the demise of the surviving borrower so as to facilitate the sale of the property by the mortgagee.
Corporation Bank has launched the reverse mortgage scheme on 14th April 2008. It is known as "Corp Shelter" for the benefit of senior citizens.
The scheme envisages the following conditions besides other conditions applicable to the scheme.
Married couples will be eligible as joint borrowers provided one of them has completed 60 years of age and the other has completed 55 years of age.
The loan amount will range between Rs.1 lakh and Rs.50 lakhs. The amount can be used for any purpose but the borrower must pay off any existing mortgages with proceeds from reverse mortgage.
The borrower shall not use the proceeds of reverse mortgage loan for speculative trading purposes.
The rate of interest on the loan will be 10% p.a.. The borrower has the option to choose either the fixed rate, rate of interest or floating rate of interest.