There are several options to invest your money in to get a regular income after retirement. However, an additional cash flow is always welcome. Among the many schemes that exist for senior citizens in India, reverse mortgage is a lesser-known scheme that also offers a regular cash flow.
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Here’ all you need to know about a reverse mortgage scheme.
What is a reverse mortgage scheme?
The reverse mortgage scheme was introduced in 2007-08 by the Indian government to enable senior citizens get regular supplementary income. Under this, senior citizens above the age of 60 receive periodic payments every month against the home owned by them.
They can mortgage their owned residential property as collateral with a bank or a financial institution and get the loan. This is the ‘reverse’ of a home loan where the bank pays monthly as opposed to the borrower paying monthly EMI.
The maximum monthly payment is capped at Rs 50,000 in a year.
How does reverse mortgage work?
The bank decides the loan quantum eligibility based on the house's condition. The general loan-to-value ratio under this scheme is 60-80 percent.
This means that for a property worth Rs 1 crore the loan amount can be between Rs 60-80 lakh. The maximum loan amounts most banks offer is Rs 1 crore despite the property’s value.
The maximum loan period ranges from 10-20 years across major banks.
The bank disburses the loan amount to the borrower through periodic payments after considering a margin for interest costs and price fluctuations.
The periodic payments are also called reverse EMIs. With payment of each reverse EMI, the equity or the individual's interest in the house decreases.
Eligibility
To get a reverse mortgage scheme the applicant must be over 60 years of age.
The loan can be only against the mortgage of a fully owned and self-acquired home which is not inherited or gifted.
The property to be mortgaged should be at least 20 years old.
Repayment
The loan amount gets due after the last survivor dies and the heir of the borrowers is given the option paying the due amount along with accumulated interest.
If the nominee of the loan cannot repay, the bank recovers the amount by sale proceeds of the property.
Any extra amount from the sale of the property is paid to the nominee and if the sale proceeds are lower than the loan amount, then the bank bears the loss.
Benefits of reverse mortgage
A reverse mortgage scheme serves as a supplementary income source.
Senior citizens are free to use reverse mortgage income for any purpose.
The money received on reverse mortgage is totally tax-free.
Senior citizens can have the option to repay the outstanding loan without any charges.
All home repair expenses eligible can be claimed as a deduction from the loan amount.
Also read: Money Money Money: Networth vs cash flow
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