Last year?s Budget brought a new scheme into India-the reverse mortgage scheme. While this new wonder has been looked at with much suspicion and scepticism, giving it another look may prove beneficial in many ways. Reverse mortgage is a system that has been active in countries like the UK for many years and has helped many an individual. The basic concept of a reverse mortgage is, as the name suggests the opposite of a normal mortgage that one takes. Here, the borrower mortgages his house to a bank, which in turn will pay the borrower a certain sum of money for a set interval and will finally, after the death of the client, sell his/her house, recover their loan and interest charged from the proceeds. The remaining money, if any, goes to the legal heirs or is disbursed as per the will. Throughout this time frame of usually 15 years, the borrower continues to own the house and should reside in the same. This, of course, is only the basic concept behind the scheme and there is a lot more to it than meets the eye.
Things to be aware of
The eligibility criteria for individuals who wish to apply for this scheme is that they must be above 60 years of age. While earlier it was mandatory for both husband and wife in case of joint borrowers to fulfill the age criteria, currently if any one of them is over 60 they are eligible for the scheme. Different organisations providing the loan will have different set of rules and the same should be confirmed with them. The borrower/s should be the owner of the home and it should be self acquired and occupied, with a clear title in his/her/their name. The house should be located within India and should be free from encumbrance. It should be in saleable condition with a residual life of more than 20 years.
If the following basic criteria have been followed then the next step that one should look into are the incidental costs that the scheme carries. These costs usually include legal costs for verification of title, valuation costs of property, processing fees, insurance costs for insuring the house against fire, earthquake and other calamities. The house will also have to be kept well maintained as it should be in saleable condition if need be. These are the basic requirements that most organisations extending a reverse mortgage look for. The house should also be self occupied and should continue to be used as your primary residence, failing which the loan will be terminated. Residing somewhere else for more then a year usually concludes a change of primary residence.
All about money
This scheme basically involves a person receiving money from the lending institution for a period of 10-15 years at a certain rate of interest. Thus the money you receive is determined by the value of your property. However, it is not the market value of your house that will fetch you this loan, but the appraisal value as determined by the bank. The general points looked into during this valuation are the circle rate of property, the market value, longevity and structural viability, the maintenance, infrastructure, amenities and other civil engineering parameters. This being done, the maximum value you might receive for your house by the lenders is Rs 1 crore. Then based on the margin kept by the lending institution you will receive the loan amount either in a lump sum, quarterly, half yearly, monthly basis as per the terms you and the lender agree upon, for the tenure of your loan. During emergencies, most lenders are willing to give a lump sum amount of money to the client as per need.
Final stages
If the tenure of the loan taken is 15 years, and you or your spouse outlive that tenure, then you will be allowed to continue residing in the property. However, you may or may not continue receiving a loan amount, at the lenders discretion. Also, if you wish to repay the loan at any time, leave the house and live elsewhere, or any other circumstances like bankruptcy, etc, the loan will automatically be stopped. As far as repayment goes, after your death, the lending institution gives an option to your legal heirs to repay the loan with interest and take the house before the bank sells your. If they choose not to, the bank will sell the house, recover its cost and give the remaining amount, if any, to the legal heirs. For this purpose all lending institutions insist that the will of the borrower/s clearly state the house has been mortgaged to the bank under this scheme and that this is the final will drafted. If there is any change of ownership of property or a third party staying on rent or any other reason, the loan will be instantly stopped.
Make sure you check the minutest detail with the lending institution before going in for the same. This scheme does present a rosy picture but it has its thorns as well, and only after proper consideration and understanding should one avail of this scheme.