REVERSE MORTGAGE LOAN SCHEME IN BANKS FOR SENIOR CITIZENS!

REVERSE MORTGAGE LOAN SCHEME 

IN BANKS FOR SENIOR CITIZENS!

Written by Mr. M.E.Prabhakarababu, 

Former Dy Zonal Manager, Bank of India

WHY THERE IS A NEED FOR A REVERSE MORTGAGE LOAN?

Social structure has massively changed. Majority of the present day younger generations get detached from the parents as soon as getting their extra wings, extra money power and extraordinary living style. 

Lots of hesitations prevail to ask money from them? Despite owning a house property, the senior citizens suffer from financial crisis due to various reasons. They need working capital for their daily needs especially for food, medical expenses, social commitments, educating other children etc. Most of them even prefer an old age home instead of a deserted living in seclusion.

  If at all they have to fulfill their financial needs, either they should sell their property and go to live elsewhere or to mobilize money by pledging the property document with money lenders at exorbitant interest. They lack care and moral support.  

Now there is an opportunity to generate funds and live peacefully. Against this brief backdrop, the reverse mortgage loan scheme was formulated. Though it is gaining popular now, originally the scheme was born in 1961 in Portland.

Mr. M.E.Prabhakarababu, 

Former Dy Zonal Manager, Bank of India

WHAT THE SCHEME SAYS?

Here comes the Reverse Mortgage Loan Scheme to the rescue of the distressed senior citizens from financial crunch. Reverse mortgage loan is an attractive loan scheme for such senior citizens over 60 years of age to get one time or regular income against equitable mortgage of their self occupied /self owned residential property in India, either in their own name or jointly with spouse. 

Married couples will be eligible as joint borrowers but at least one of them should be above 60 years of age and the spouse not below 55 years. There is no monthly income or gross income criteria for availing this loan.

The property should be used as the permanent primary residence where the senior citizen spend majority of the time, the address of the said property is being used for correspondence, utility bills, bank statements, tax returns, banking relationships etc. Further, the borrower should provide details of legal heirs at the time of availing loan.

 

Why the name reverse mortgage? In the normal bank term loan, instalment is paid by the borrower to the credit of their loan account. But under this scheme, a regular sum, say on monthly basis, will be paid by the banks from the term loan account to the borrower periodically. Hence, it is called a reverse mortgage loan. 

The loan so availed need not be repaid like any other bank loan but to be repaid only when the owner dies or sells the said house or moves out of the house. The scheme has been formulated based on the guidelines on reverse mortgage loan by the national housing bank. Does it not look attractive, senior citizens? Let us see more.

Reverse Mortgage Scheme
 Image From www.jagoinvestor.com

PROPERTY

Here some understanding is required about the nature of property.  Loan against house constructed on leasehold land of government authorities is also considered. Generally, the property will be old and hence the residual life of the property should be 1.5 times of the repayment period minimum 20 years.   

The other essential things required are approved plan, approval for construction, market value given by panel valuers that required for any other bank loans against an immovable property. Insurance coverage should be obtained by the borrowers for the building for minimum 10 years.

QUANTUM OF LOAN..!

Based on the age of the borrower, valuation of the property by the bank's approved valuer and starting interest rate, a Term Loan starting from Rs.2 lacs  up to 25 lacs shall be considered.
For sake of clarity a chart is given below:

Age of sole applicant/ younger  in the case of joint applicants	Ratio of loan to Value of property (LTV)
	Joint Borrowers	Single borrower
60-65 yrs	45	50
66-70 yrs	50	55
71-75 yrs	55	60
76 to 80 yrs	60	65

Generally, the margin will be 35% to 55% as shown above.

RATE OF INTEREST: 

Presently the rate of interest is about 12.50% fixed in some banks. ROI shall be applied at monthly rests for the loan tenure with reset clause every 5 years period.

 LOAN PERIOD

The loan period shall be maintained up to the borrower’s age of 80 years. However, a maximum period of 15 yrs of Term Loan period is allowed up to completed age up to 65 yrs. 

Where the completed age is above 65 years, the loan period shall be of maximum 10 years in any case not to be beyond the borrower's age of 80 years.

MODE OF DISBURSEMENT..!

Disbursement in the loan shall be generally at  lump sum - to the extent of 50% of loan but subject to a maximum of  Rs.12.50 lacs or such other amount as may be notified by Government of India. The lump sum amount is to be used for medical treatment for self, spouse, dependants. 

But the loan should not be used for speculative, trading or business purpose. Lump sum will be given for genuine requirements only. Balance amount will be eligible for period payments. Amount disbursed will be discounted value of the loan amount as on date. Bank will make periodical payments to the borrower from the loan account, during loan period or till death of last surviving spouse, whichever is earlier.

Periodicity of payments from loan account (monthly/qtly/half yearly /yearly) is to be decided mutually beforehand. Borrower has option to change the periodicity as per his requirement, in consultation with the bank. Maximum monthly payments shall be capped at Rs.50,000 or such other amount as may be notified by government.

A monthly payment chart for loan amount per Rs.1.00 lacs is as under:

LTV	ENTRY AGE	MONTHLY PAYMENT FOR       5 YRS LOAN	MONTHLY PAYMENT FOR        10 YRS LOAN	MONTHLY PAYMENT FOR      15 YRS LOAN
50%	61	1208	422	191
55%	66	1329	464	210
60%	71	1450	507
65%	76	1571

Entry age for the loan is 61 years. That is, completion of 60 years.  

REPAYMENT:  

Principal and interest due are payable upon death of the last surviving borrower or if the borrower intend to repay during life time to sell the house and move out to another house permanently. 

PRE-PAYMENT : 

However borrower has the option to prepay the loan at any time during currency of the loan. 

No prepayment penalty to be levied.

REPAYMENT OF LOAN UPON DEMISE OF BORROWER

The entire balance due in the loan account becomes payable within 6 months from the death of the annuitant i.e. the borrower and the bank shall advise the legal heirs promptly by a notice. 

The legal heirs of the borrower have option to settle the loan with interest and other charges during tenure of loan within 6 months from the death of the borrower.  

SALE OF PROPERTY BY BANK: 

In case of lack of proper response from the legal heirs for settlement of the loan dues, the Bank shall take steps to sell the house property after 6 months as per bank’s rules.  

FORECLOSURE : 

If the borrower fails to pay property tax, repair and maintenance, insure the property or if borrower declares himself bankrupt or if the borrower donates the property to someone or abandon it or if the borrower rents partly or fully or if the borrower creates any encumbrance, will / gift deed, the loan account shall be foreclosed.

Contact Details of Author..

Prabhakara babu Poet

 (Dy Zonal Manager/Asst General Manager) 

 No.3, Solai Street, Ayanavaram, Chennai-600023

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