Boon for Women to Enjoy Financial Stability
Ajay Kedia, Managing Director, Kedia Advisory
If you are a single woman, you may have a greater “longevity risk” than the average couple or a single man. Women who are widowed, divorced or never married may have greater financial planning needs as women tend to live longer than men and generally have less money to do so. This is generally due to the fact that women have a longer average life expectancy than men and tend to marry men older than themselves. Everyone, especially single women should obtain a full financial assessment that includes looking over investments, insurance, financial goals and estate planning.
The increase in life expectancy of people is good news, but, this also calls for making monetary arrangements to live a care-free long life. Among the many initiatives launched by the government to help senior citizens in this regard is the reverse mortgage. The mortgage scheme was introduced in 2007 by the government with an aim to help senior citizens live a life of dignity in their dusk years.
Reverse Mortgage in simpler terms can be explained as the process where the borrower receives a periodic payment on the mortgaged house while continuing to reside in the house for their entire life. The ownership of the property is transferred to the bank after the demise of the borrower.
How does reverse mortgage work?
The bank analyses the value of the property considering factors such as current property prices, demand for the property and condition of the house. After considering price fluctuations and interest costs, the bank disburses loan amount in the form of periodic payments. Over fixed-loan tenure, the borrower receives the periodic payments which are also known as reverse EMI (equated monthly instalment). The individual’s interest or equity in the house decreases with each payment. Such loan is an ideal option for senior citizens if their property is of illiquid nature owing to some reason or for those who require a regular source of income.
The Reserve Bank of India (RBI) has stipulated the following guidelines with respect to reverse mortgage.
- Sixty per cent of the residential property would be the highest loan amount.
- Minimum tenure of the mortgage is 10 years, and the upper limit is set at 15 years. Some banks also offer 20 years as the upper tenure.
- Loan payment can be made in a lump sum, monthly, quarterly or annually.
- Every five years, a property revaluation would be undertaken by the lender. The quantum of loan can be increased if the valuation has increased. The incremental amount can be given in lumpsum.
- Since the amount received through a reverse mortgage is a loan and not an income in taxation terms, it will not attract any tax.
- For the purpose of recovery of the loan, capital gains tax is levied on the borrower at the point of alienation of the mortgaged property.
- Interest rates of reverse mortgage which can either be fixed or floating are decided by the prevailing market rates.
- The house owner should be above the age of 60 years. In the case of co-applicant being a spouse, they should be above the age of 58 years.
- Residential house or flat in India which is self-owned and self-occupied are considered for a reverse mortgage. The titles should be clearly stated indicating the ownership of the borrower of the property.
- The property should not have any legal hassles or any encumbrances.
- The property should be the permanent primary residence of the borrowers.
- If the last surviving borrower passes away or the borrower chooses to sell the house, a reverse mortgage loan becomes due. First, the bank gives an option to the next of kin to settle the loan along with interest without selling the property.
- If the next of kin fails to pay for the loan and interest, the amount is recovered through the proceeds from the sale of the house.
- If there is any excess amount after the settlement of the loan with expenses and accrued interest, it will be passed on to the legal heirs. However, if the sale proceeds are lower than the accrued interest and principal amounts, the loss is borne by the bank. Such losses can happen if the real estate market prices are not in line with the original estimation drawn by the bank.
Other Important Aspects
- During the tenure of the loan, borrowers can prepay the loan at no additional charges.
- The borrower can continue living in the house even if they outlive the tenure of the loan. Only the monthly payments may cease. But, after the death of the borrower, the settlement takes place.
- In the event of the death of one of the spouses, the other can continue living in the house. The settlement will only take place at a later stage after the death of the survivor.
- The loan can be foreclosed in the following circumstances:
- If the borrower has not stayed in the house for a continuous period of one year
- If the home insurance has not been taken or if the property taxes are not paid
- If the borrower goes bankrupt
- If the borrower of the mortgaged property donates or abandons the property
- If the security of the loan for the lender is affected by changes brought in the property by the borrower, the loan amount can be foreclosed. For instance, in the event of an additional owner being added in the property or if the property is rented out partially or fully or any such encumbrance is created on the property
- If for safety or health reasons, the government condemns the residential property.
A reverse mortgage loan may not be suitable for everyone. However, for many it can offer a supplemental source of income and provide a financial safety net throughout your retirement years.