The Reverse Mortgage Loan (RML) was Introduced in India 10 years back (2007) to improve the life of house-owning senior citizens. RML is a loan that enables them to meet their day-to-day expenses pertaining to food, medicine, and repair of the house. At an age when the majority of people do not have a regular source of income in India, RML is a friend of the rainy season. Minimum age of availing the RML is 60 years, irrespective of the gender difference, and if a couple seeks a joint loan, then age limit for the spouse is 55 years or above. The applicant must have his/her own purchased house as RML cannot be secured against ancestor's property. There are various factors on which banks and other financial institutions assess the value of property, but its minimum residential life shouldn't be less than 20 years. Whereas age of the individual, RML plan, and prevailing interest rates are some standard criteria for calculating the monthly or lump sum amount. Presently, Rs.50, 000 is the ceiling limit in monthly payment plans, and 50 percent of the loan amount is the maximum lump sum limit.
Undoubtedly, RML is a great financial tool for senior citizens who want to live independently even in the old age. But to get maximum benefits from any tool the user must be aware of its flip side too; because superficial knowledge of RML may cause many incessant troubles in the post-retirement phase. So, to ensure peace of mind at that crucial age, one needs to be very smart as well as cautious while dealing with the sales gimmicks of loan providers. One should make oneself assured that he will not be cheated after signing the papers. Hence, besides doing extensive research in advance, one should also seriously take the advice/precautions shared below.
There are mainly two types of RML available in the Indian market, one is Regular RML, and the other one is RMLeA (Reverse Mortgage Loan-enabled Annuity). One should be very careful while assessing one's future needs, as these two are entirely different and purpose specific.
Usually, banks in our country offer 40 to 50 percent of the market value of a residential property. In case, if a lender is making promises to offer beyond it then think thrice and take the help of a reputed financial consultant to unearth the truth.
Quite often banks claim that they charge a one-time processing fee (0.5% of the loan amount), but in reality, like any other loan, there are many hidden charges that a borrower comes to know in the latter stages. Therefore, you should be well-informed about the potential costs in advance.
There is no compulsion regarding the repayment time; a borrower can redeem it even before the agreed time duration. Also, one need not repay the mortgage as long as one lives in his/her house. Payment is due only when the person passes away, sells or moves out of his/her residential property. In the case of borrower's death, the bank holds all rights to sell the property and recover the loan. And, if the proceeds exceed the due amount, then the bank is obliged to return the same to the legal heirs.
However, without letting the property get sold by the bank, legal heirs can still get the mortgage released by repayment of loan amount along with accumulated interest. The no prepayment- penalty feature is also there easing out the burden of borrowers and letting them make the advance payment of the loan as and when possible.
Under the Finance Act 2008, the government has exempted the RML. According to this act, no tax shall be levied if the borrower or the legal heirs return the full amount from other sources, without selling the property. This is only one side of the story because ironical to this there are still some taxes that can haunt the borrowers. In case, the property is disposed of by the lender; then the borrower is liable to pay income tax on capital gains. Other than this, even the annuity income in the hands of recipients is also taxable.
Eligibility for a reverse mortgage requires a person to prove that he/she can make their homeowner's insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure and loss of home. So, think before you leap into it. Remember, you have the right to cancel the deal within 3 days of finalizing it. So, don't hesitate to cancel the deal if you think something went wrong. However, this money can't be invested in shares and real estate.
Now Rejoice the Regret-free Future
A reverse mortgage is an excellent option for the retirees who wish to have a better lifestyle but are lacking in covering their expenses from the meager income that they are getting from other sources. Consider the benefits and drawbacks simultaneously, and if the former outweighs the latter, then surely a decision of getting the Reverse Mortgage Loan will not ever make you repent.
Authored column by, Amit Mittal - Founder & Chief Consultant Officer, eSilverbucks Consultants