What is Reverse Mortgage ?

POSTED BY manish ON June 6, 2010 COMMENTS (100)

What is Reverse Mortgage ?

Simple! Reverse Mortgage is the exact opposite of a Home Loan. Anyone, who has a fully owned House can get a loan. The way, this works, is that his loan money will be divided in chunks (EMI’s) over many years and given to him every month. This can easily act as Monthly income. At the end of the loan tenure, the Bank stops paying the monthly income. If one of the spouses dies, the other can still continue living in the house. If both die, the bank gives their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. For people who don’t know – “Mortgage” means “Loan” 🙂

Reverse Mortgage Loan in India

How is the loan paid ?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Which means the loan has to be paid only after both the borrower and spouse die.  Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains. Read about Real Estate returns over last 10 yrs .

Example :

Mr Ajay is around 62 yrs old, and his wife is 60 yrs old, they live and own a house in Karvenagar, Pune which is worth Rs 1 crore now . They have a daughter and son who are their legal heirs (50:50) . The old aged Ajay and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage loan. The Bank is ready to loan upto 60 lacs to them, which means they will be paid Rs 35k per month for next 15 yrs (just an example.)

Now, they start getting monthly income of 35k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Ajay dies at age 79. After this, his wife still continues to live in the house. Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)

Now the loan has to be paid off. The son and daughter does not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 3 crores. The bank sells the house and get total 3 crores, out of which 1.1 crores is taken by the bank and rest is paid to legal heirs, which they split amongst themselves. Look at EMI Calculator

Which Banks Offer Reverse Mortgage ?

  • National Housing Bank (NHB)
  • Dewan Housing Finance Limited (DHFL)
  • State Bank of India (SBI)
  • Punjab National Bank (PNB)
  • Indian Bank
  • Central Bank of India
  • LlC Housing Finance
  • Andhra Bank
  • Corporation Bank
  • Canara Bank.

Tip from Hemant : “Star Union Dai-ichi offers annuity cover with reverse mortgage . When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “

Important Points in Reverse Mortgage

  • Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she  should be above 58.
  • The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
  • The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company.) Minimum tenure will be 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
  • The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
  • The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
  • The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. How to do last moment Tax Planning ?
  • Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
  • Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
  • One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.

How do I apply for Reverse Mortgage?

  • Decide to pledge your house for reverse mortgage.
  • Go to the branch of the bank, who you have a banking relationship with, and provides Reverse Mortgage
  • Fill up the necessary form, the bank offers for reverse mortgage
  • You need to furnish your personal and financial details like: the property, your legal heirs, and so on.
  • Proof of ownership; you will also need to furnish property papers and a proof that the house that you are pledging is your residence.

When to consider taking Reverse Mortgage ?

Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death, is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case. In India, Reverse mortgage isn’t very popular yet, because of bad/negligible marketing and our mentality, where we dont take loan on our most valuable and most emotional asset “Home” 🙂 Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades .

Comments? What do you feel about Reverse Mortgage Products? Do you think it’ll become more popular & successful in the coming decades?

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100 replies on this article “What is Reverse Mortgage ?”

  1. Sanjay says:

    The best article I found on RML. Thank you!
    A few questions:
    1) If I’m still earning after retirement and take this facility to have more income, I can invest the surplus in some funds, stocks or in my loan OD account. Is that permitted?

    2) In above case, does the total income become taxable considering this surplus?

    3) Assuming 35k per month for 5 years, if I decide to prepay at that time, how much approximately I will need to pay to get it back, considering an interest of 12%?

    Many thanks,
    Sanjay

    1. Yes, you will be liable to pay the taxes if its above the limit

  2. Partha says:

    Nice article with a self-explanatory flow chart. Just asking whether this loan (or interest accrued each year) is eligible for income tax benefit as negative income from house property?

    1. No, its not eligible for tax benefits

      1. Partha says:

        Thanks Manish.

  3. shyam says:

    Very Nice Flow chart, Thank you very much for make it understandable in simple language and example

    1. Thanks for your comment shyam

  4. hi my father is 67 year old he is a retd. central govenment employee,i have plot of 1000sq feet. in Bihar .Is he is aplicable for taking RML.he have 1 daughter and one son(married).but he not depend on his father .will he get the RML OR Home Loan (against property)

    1. Hi sanosh prasad

      I am not clear on what is your question. Please repeat it with more clarity

      Manish

    2. Hi sanosh prasad

      I am not clear on what is your question. Please repeat it with more clarity

      ManishHi sanosh prasad

      I am not clear on what is your question. Please repeat it with more clarity

      Manish

  5. UlhasSinnarkar says:

    My 86 year old Mom is owning the house/flat in CHS at Mumbai, which has been contracted with a Builder for redevelopment. Most probably the house will be vacated in near future and all the members will be asked to shift to the rented houses/alternative accommodation. Though the rent is due from the builder, it will not be sufficient for renting out a comfortable stay in Mumbai itself along with household/emergency expenses. Thus requiring supplemented income source such as annuity . The redevelopment and reconstruction of a new building/flat is likely to take say 5 years. Under the situation, is RML for a duration of 5-10 years possible with an option to sell the house once ready after 5 years? Further is it possible to apply and get RML during reconstruction period if so required? To add more, most of the properties in Mumbai are now more than 30 years old and are going in for Redevelopment. Will such properties be eligible for RML?

    1. NO , RM is not an option in this case

  6. Anonymous says:

    “One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.”

    Please recheck this in your article. There is a prepayment penalty of 2% imposed by some banks if the loan is taken over by another bank/FI.

  7. Sunit says:

    It’s very informative and useful information, liked very much. Thanks

    1. Thanks for your comment Sunit

  8. DR.V.V.BARVE says:

    I intent to avail RML from Central Bank of India. I have two sons and one daughter all are married and staying independently. I do not get any pension as I worked in Private Sector. My children although caring, have their own financial liabilities like education of their children, repayment of housing loan etc. So, I do not wish to be a burden on them financially. My query is : Whether I will have to obtain their concurrence for availing RML. Also, explain role of Star Union annuity with example. I am 73 and owns a flat in Pune constructed 3 yrs. back with a present market value of Rs.1.25 cr. Your early reply shall be appreciated.

    1. Hi DR.V.V.BARVE

      Actually this is a very new thing and we dont have knowledge till this level . I think the best thing you can do is get clarity from the bank itself !

  9. Shrinath U says:

    Sir,
    My father is retired person at the age of 58. and less pension is coming, No other income also coming. and we have 1500 sq ft property any provision for taking Reverse Mortgage Loan at the age of 58 age.

    1. Yes, you can apply for it .. See what the bank says !

      1. Shrinath U says:

        Banks says. first borrower should be 60 years, not less that 60 age its not possible to give Reverse Mortgage Loan,

        1. Then you cant get it . Is your father not above 60 yrs old ?

  10. K D says:

    Hi Manish,
    In case of divorce maintenance case if court order recovery ( payment to wife)
    Whethet Banks consider such order and sanctioned Reverse Mortgage loan .
    Also to avoid court order if smart husband transfer his property in tthe name of spouse (second marriage).
    Age and other criteria qualifying.

    1. I am not very sure on this .

  11. Chandra says:

    Hi Manish,
    The article that you have posted is really useful. Thanks a lot.

    I am a senior citizen aged about 63 years. I have a doubt regarding Reverse Mortgage. I own a Vacant Site and not a residential property. Can I get Reverse Mortgage Loan on that?

    1. No Chandra

      Its not possible on plot

  12. Swapna says:

    Hi manish,
    Plz suggest me which is the better option to stop my brother from selling the house owned by my mom.
    1.Reverse Mortagage loan
    2. Home loan
    I want to pay the amount to my brother and own the house which is emotionally attached to us. My mom got this house from my father after his death. It is the self acquired property of my dad. My mom registered a will , this house passes to my brother after her demise. But my brother wants money now itself and is forcing my mom to register the house in his name so that he can sell it immediately.
    My mom is unhappy with this and asked me to buy it. I don’t have enough money to buy it now. She can’t give it to me as my brother is fighting for it. I am only daughter,married and iam a govt. employee.
    So, plz suggest me what should I do?

    1. Shall I ask my mom to take RML and pay the money to him(I can pay the extra money if bank restricts the lump some money not to exceed 15lakhs)

    Or

    2.Shall I take home loan,purchase it from my mom and pay the money to my brother?

  13. Harshil Roy says:

    Hi Manish,

    Confused about the repayment of the loan. Let’s take an example, The value of the house is 15,00,000 and bank grants 90% loan of the value. Considering, 10.50% interest rate, the EMI comes to 3,110 for 15 years loan.

    Real Question starts now. Bank revalues the home after 5 years and considering growth rate of 15% p.a. the value of the house comes to 30,17,000. Now what will happen? Will the EMI increase and by what amount and HOW?

    If couple dies after 5 years and their child wants to buy the house back from the bank, what amount does he need to pay at that time?

    Looking forward to the solution….

    1. Nothing will change on reevaluation . The only amount needs to be paid is the main AMOUNT which was taken as loan

      1. Harshil Roy says:

        I am not sure whether what you say it is correct. Please check the link and find the word revaluation.
        http://www.indianbank.in/loans.php?by=8&ty=1

        1. Hi Harshil

          In that seems like some new changes have come . I had written this article long back, at that time I didnt come across anything on reevaluation !

          Manish

  14. Vijay Anand says:

    Hi manish,
    My father applied for reverse mortagage in 2009 and closed the loan in 2013 from SBI Chennai. Bank people suggested not to close the loan account, so it will be easy & quick to reprocess if same loan is availed in future (bank will keep the documents). Now,my father for an urgent need has applied again for loan but after making him run for 3-4 times from branch to central processing center, his application was rejected stating that his exisiting loan should be closed before reapplying. Now, we’re worried and not sure how long it will take since we would need to close the existing loan account, get back the documents, get EC updated, reapply, reevaluation etc. Do you have any idea how to reapply this loan more than once. Also, they gave 20 lakhs first time now they’re saying my father will be eligible for 15 lakhs only..I don’t understand this as well..so, age factor also plays role in reverse mortgage loan?

    1. Definatly, age factor will matter, then the age of building must have increased now compared to first time .. all these things matter.

      True that the whole process will take time now . You cant do much other than follow the actual procedure ! . Its always a good idea to keep 3-4 months buffer time !

  15. Rajesh Patel says:

    I assume there may be periodical inspections/visit made by the bank, once in a year.
    I dont want to be technically/legally wrong. I can go and stay for a month in a year at home to technically/legally be correct that I have not moved out of my home.

  16. Rajesh Patel. says:

    Sir,
    I plan to apply to a bank for a reverse mortgage loan. I have a home
    in Mumbai. My son stays & work in Pune. I stay with my son in Pune.
    However, I dont want to get money for monthly expenses from him. My
    home in Mumbai is closed. I read a clause that I need to be residing
    in the house that I mortgage. I also read that if it is not my
    “permanent home” the loan may be recalled. I think it is a restrictive
    clause. However, will I be denied a loan
    because of my not staying in my home in Mumbai ?

    Thanks and Regards,
    Rajesh Patel.

    1. It might happen , however you can always be there till the loan processes and then later you can move out . How about an arrangement with your son to buy the house from you and pay you pension on that ?

      Manish

  17. Mahesh P says:

    Hi Manish,

    The concept is very well narrated.

  18. Devashish Pattanayak says:

    Dear Manish Hi!
    Sorry for replying late.Actually the house at where we are staying presently is a purchased one.If i get issued a free holding certificate for it now, can it help me to prove that the house is owned just now or from the date of its purchase ie after yr 2000?I dont want my parents to lose this house of dreams of theirs and as i ‘m unable earn well for now.As I suffered huge losses in my business.Its improving but i had to change my channels of retail business in to a multi-retailing one.
    What at best can be done presently to improve on our finanacial gains?
    As we as a family , had thought to rebuild the house and furnish it two more floors ie 1st and 2nd so that it will help my parents income to grow at old age and since there is a lumpsum expenditure on medical expenses in old age.What do u suggest?
    I hope you not getting me the other way round.ppl have misunderstood me here in the last round also thinking me to be incoherent of my parents’s problems.Pls help.
    With best wishes,
    Devashish Pattanayak.

    1. NOt sure , but lets discuss it over forum now – http://www.jagoinvestor.com/forum/ . MOre and more people can give their ideas there !

  19. NEHA says:

    MR MAHESH,
    NEED YOUR ADVICE. OUR HOUSE GOING FOR REDEVELOPMENT IN FEW YEARS. WE NEED TO PAY SOMEONE SOME AMOUNT. SO THINKING OF GOING FOR REVERSE MORTGAGE. DOES THE INTEREST AMOUNTS TO BE TOO HIGH AFTER A PARTICULAR PERIOD. IS SELLING AND PAYING THE LOAN IS ALWAYS BETTER THAN GOING FOR REVERSE MORTGAGE ?

    1. If its going for redevelopment then how will it help to go for reverse mortgage .. ?

  20. RAJESHWAR says:

    Good article Manish… Yes as ur 1st word,Its really simple to understand to every one and i thinnk it is useful to the parents who are suffering for money when thier children are not supporting.

  21. H K RAGHU says:

    Manish, I very badly need to discuss in detail with you on my issue on reverse mortgage on my father’s propery Sir. I am really scared that my father’s property may be lost. Need your urgent attention and suggestion on this Sir.

    1. You will have to open a thread on our forum to get fast replies- https://www.jagoinvestor.com/forum/

  22. H K RAGHU says:

    Dear Manish,

    My dad had availed of the reverse mortgage loan from Central Bank of India and now we have a deep trouble in closing this loan since the bank is asking us to close the entire amount including the amount invested in Dai itchi insurance which comes to around 37 lakhs as of date (whereas my dad has just availed a loan of 8 lakhs). I need you very urgent suggestion in who can help us in this matter. This is very very urgent and I wish to discuss this with you in detail on this Sir. I am available on 99457 17057. Request a urgent call back to discuss on this issue Sir.

    1. Not sure of this issue ? What is the investments in insurance ? You will have to discuss the issue at our forum . We do not have any calls facility . this is just a blog

      1. H K Raghu says:

        I am available on 99457 17057. This is a very urgent issue Sir and if you can call me back would be very happy or please provide your no so that I can call you on this issue

  23. Chechu says:

    I am 72 and I own a house which is worth 1 crore. I want to go in for RM with the folowing conditions. I don’t want fixed period of 10 yrs or 15 yrs. So long as me and my spouse survive, I want bank to pay us a decent sum, say 75,000.00 pm. Once both of us die, it may be tomorrow or any indefinite time, let the bank own the house. No heir to claim anything. Is it possible? By the by, you have done a yemon service by writing a nice article. May God bless you. Our good wishes are always with you.

    1. I am not sure if you will get exactly that much . Because RM is provided for only upto 60% of the worth of house . And it depends how much money you will get out of that much . WHy not sell the house and move to another house which is much cheaper and use the rest of the money which is left in a FD with monthly interest, this seems to be the most simple thing to me !

      1. Chechu says:

        Thanks for your quick response. I will think on the lines which you recommended. Thanks again.

      2. Harshil Roy says:

        Total Loan can be up to 90% of the value and lumpsum can be maximum upto 50%.

  24. Pratik says:

    excellent!i never knew abt reverse mortagage!

    1. Glad to know you liked it 🙂

  25. Dhaval says:

    Dear Manish,
    I think what you are doing is great and recommend your site and book to any person who wants to start financial planning.

    I am unsure about the calculations given in the example in this article. Please correct me if i am wrong, but in the example of Mr. Ajay, who decides to go in for a RML for a 15 year term, Any bank will only pay him around Rs 14k per month for next 15 years (considering Rate of Interest @ 10.5%) and not Rs 35k. No bank will offer a loan at 0% rate.

    However, I have not found any installment calculators for RML on any of the bank sites so I am not sure about this calculation.

    regards

    1. Dhaval , so what should be the right calculation as per yur thinking ?

      1. Dhaval says:

        I believe the payout in this case: for a loan of 60 lacs at Rate of interest of 10% would be around 14300/- per month. This figure cannot sustain a person for long, so there is an option to revalue your house every 5 years and reset the monthly amount & the loan to a higher value and keep with the inflation. I haven’t actually inquired about this but, i did read an article (link below) in economic times once.
        http://economictimes.indiatimes.com/personal-finance/et-wealth/reverse-mortgage-unlock-the-value-of-property/articleshow/7168115.cms?

        The bank has to take interest for the loan that they give, otherwise it wont be able to make profit.

        regards

        1. Rohit Varma says:

          Hi Manish/Dhaval,

          I had the exact same question after reading this article 🙂
          Thanks Manish for a wonderful article. Pictorial representation makes it much easier to understand..

  26. Sunil HS says:

    Excellant article.

    My father is eligible for reverse mortgage loan and approached central bank of india for the same.

    The bank has evaluated our property and has confirmed he is eligible for 32 lakhs loan(15 lakhs one time payment and rest 17 lakhs monthly annuity).

    My questions are:

    1. Is it possible to prepay the loan along with the interest any time during the loan
    tenure. is there a pre-payment penalty?

    2. After receiving one time payment, can he stop monthly annuity (anytime) if his financial situation improves?

    3. Can he repay the amount(howmuch ever possible) along with interest whenever possible?For ex: 5 lakhs every year for next 4 years.

    please let me know if there are any drawabacks in the scheme from central bank.I am confident that our financial situation will imporve in future and wants to close the loan soon. (max another 5 years)

    Please clarify ASAP. Thanks in advance.

    1. Sunil

      As far as I understand the reverse mortgage loan is not paid on ONE Time basis , Its a monthly payment , its like a annuity product .. Are you sure the bank has agreed to pay one time lumpsum + monthly ?

      1. Sunil HS says:

        Central bank of India.

        1. Sunil HS says:

          Confirmed. In central bank of india they have agreed to pay onetime lumpsum + monthly.

          1. ok , in that case you will have to check with them with all these questions

  27. RakeshAgrawal says:

    Thanks for the detail information, It would be great if one can answer following questions:
    – Can a person avial this Reverse Mortgage on more than one house ? say i have 3 residential properties and want to use all those for getting a large amount
    – Can this be used in medical imergency, like i need a lum-sum amount to handle my expenses for a critical illness ?

    1. Yes you can get RM for 3 houses, but they all will be treated seperately .. RM gives you monthly income,not a lumpsum

  28. Deepak says:

    Hi Manish,

    I had a chance to enquire with SBI & other banks. As per them, they are not offering any lump sum payments at this point of time.

    My Dad has debt of 35 lakhs & his house is worth 60 Lakhs. They refused to pay him lump sum payment of 36 Lakhs which is 60% of the property value. Instead, they asked him to go for lump sum pay plus periodic pay option.

    So for people who are looking for lump sum payments, this is not an option as of now.

    Pls. clarify if I’m right with this?

    Regards,
    Deepak

  29. J.VISWANATHA. says:

    The reverse mortgage will not help senior citizens on long term. The amount paid by banks/institutes as lump sum/annuity are very low compared to property valves. Interest calculated are compound interest.

    1. Yes .. Reverse Mortgage is not the best solution to them , but one of htem .. what else do you suggest to an old couple with an house ? An alternative is to sell the house , start living on rent and use the money for monthly expenses

  30. Sudha says:

    Manish,

    Thaks for the explanation , however 1 question.

    The house is in my Dad’s name , he passed away in 2004 , now Mom & me are the legal heir , as I am the only child. Can at any point my mom go for RML with me as co applicant so that I may pay off the loan with in time and not wait till it becomes a ICE BALL.

    I mean she need not not take money from me but take RML and i pay the amount like EMI, is this possible.

    Thanks

    Sudha

    1. Sudha

      You dont pay any EMI in case of a reverse mortgage .. Its opposite of a loan.. here you pledge your house and get the income out of it , but at the end of the peroid the bank will either take the house , or it will ask the legal hiers (in this case YOU) , to pay teh loan amount and take the house . Also note that your mother can apply for RML only if the house is on her name and the house is not too old .

      Manish

    2. Sudha

      Again .. there is nothing like PAYING EMI in RML , its not a loan , its a reverse of the loan where bank has taken your house as LOAN from you and pays you the income (see it as bank paying EMI) and then once the tenure passes like 15-20 yrs , now the bank will ask your to pay the LOAN the end in lumpsum (not in parts) and then if you can pay off that big sum, then you take the house ,else it will go to BANK , so here there is nothing like PAYING EMI .

      Also, I am not sure if you can jointly go for Reverse mortgage because its only for old people. better you contact the banks which provide reverse mortgage and then talk to them about what can be done .

      Can you tell me that what is your situation and what exactly you guys want. Lets see how we can achieve it ? Do you want to generate a regular income for your mother but dont have a LUMPSUM money ? Is that the case ?

      Manish

  31. rashmi says:

    hello,

    excellent detailing of RM. it has cleared almost all my doubts, will you please mind answering few of my queries ?

    my uncle is 62 years old and he owns a house valuing above 1 crore. he needs about 20 lacs immediately to pay some bank debts. he is planing to sell off one of his floors in order to pay the debts.
    I want to know :
    1) what is the procedure for reverse mortgage ?
    2) how safe it is ?
    3) how fast can he get this loan ?
    4) can he rent his house afterwards or not ?
    5) can he get 20 lacs and then monthly income too ?
    or just 20 lacs against the house and then be happy with his regular house rent ?

    i dont want him to sell of his property at this age so thought of reverse mortage.
    please answer with all pros and cons if possible i will be really grateful Manish.

    thank you.

  32. manish vaid says:

    Hi Manish …seeking a clarification…one of my known has applied for reverse mortgage with SBI for rs 20 lacs against a property of worth Rs 1.20 cr , but sbi says they shall sanction rs 80 lacs and disburse only 20 lacs. Also some one from sbi told them that if some thing happens to applicant the sanctioned amount is to be payed back. Dont think that sanctioned amt shd be payed back…what do you say…

    1. Manish

      May be they will disburse it in parts ? Did you clariify ?

      Manish

  33. Hi Manish,

    Reverse Mortgage is a good platform for Senior Citizens when it come to earning monthly income.But progress has been slow in comparison to what was expected.The reason is annuity. If you look at annuity based products like pension plan then you don’t feel very comfortable.What do you feel?Insurance companies in tie up with banks will be able to design a better product.

    1. Jitendra

      The problem I see here is 2 things

      1. Awareness about the RM product , it would progress well if more and more people know about it

      2. In India , its unlikely that houses are owned by Senior citizens and even if they have it , its very old one which does not get considered for RM as a house can not be older than X years as per the RM rules . Most of the new housed are owned by 30-40 yrs old who are again not eligible

      A Lot of restructuring is required in the product to make it success . It has to come in smaller cities for sure

      Manish

  34. Ajit Kumar says:

    There two vital points which need to be considered in this scheme.
    1. Inflation accounting has not been considered. At ~10% actual inflation(not Govt figures) per annum, the ‘monthly income’ from reverse mortgage 35K, will progressively diminish in “Purchasing power’ to half in the next 7~8 years(Einstein’s eighth wonder, ‘power of compounding’ works negatively). The correct way is to organise a ‘inflation adjusted’ ‘monthly income’ for constant PPP(Purchasing power parity)
    2. Many of the properties will appreciate in value, over the years. There is a clause for revaluation of property after X years & corresponding improvement in ‘monthly income’. This helps to offset inflation.

    1. Ajit

      thanks for your additional information . Reverse Mortgage is hence the last option one should opt for as far as I understand .

      Manish

  35. Ash says:

    Nice to see these financial innovations of the western countries (US?) slowly make their mark in India. You have covered most of the technicalities involved in a Reverse Mortgage. Reverse mortgaging seems to be a good way to convert a fixed asset into positive liquid cashflow.

    I am totally with you suggest this *should not* be a part of *retirement plan*. Sure these schemes will be in vogue in coupe decades when the current asset rich cash poor generation reaches retirement age. This may be in some cases their only saving grace.

    Pardon me if I’m going offtrack, a proper Financial plan shouldn’t end at self and spouse. I’ve noticed most run of the mill financial plans end with ones (including the spouse) retirement goals. While it may serve its purpose, I believe a financial plan should be farsighted enough to consider the needs ones next generation. If one takes a look around, families that have been affluent for generations have managed to stay affluent (despite the third generation jinx) because their older generation planned not just for their children but grand children, in some cases great grand children too!

    Coming to Reverse mortgage – this is a product best suited for broken American culture, where the (most) kids do not support their parents in their old age, and their parents do not have a healthy cash flow during retirement. I hope Indian family tradition is not broke enough to make schemes like these a part of retirement planning yet 😛

    1. Ash

      What you say is correct . Indian Families should not go that way , we should be with our tradition , but still there is a class of citizens who are Asset rich class , but no income to support , their children are working out of their city and hence in those cases sometimes it may make sense to go for these products .

      Regarding your Next generation planning point, I agree to it, A good financial planner always takes into account if a client want to leave some inheritance asset or amount and accordingly plan for it .

      Manish

  36. Rupali says:

    Thanks Manish,

    So that is the interest component you are talking about, once both both borrower and spouse die it starts growing with interest component.
    60lacs+Interest= total outstanding. Got it. Thanks 🙂

  37. Rupali says:

    Hi Manish,

    Thaks for the details of RM. I have one query in Ajay’s example the total RM amount was 60lacs as 60% of 1 crore.But you did mentioned that at the end of 15 yrs the amount would be 1.1 crores, how you have calculated this??

    Thaks & Regards
    Rupali

    1. Rupali

      60 lacs will be due just after the loan tenure of 15 yrs get over . After that the interest will be applicable and when both borrower and spouse die, the actual loan amount will be higher . If you look closely its 1.1 crores when the spouse passes away . This 1.1 crores is just a random figure I have taken for simplicity , it will be higher or lower depending on the interest rate .

      “Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)” .

      Manish

  38. Pratik , Baroda India says:

    Dear Manish,

    Kindly advice on Nabard Bhavisha Nirman Bonds ? are they buy for long term.

    Regards

    Pratik

    1. Pratik

      I have no idea on these as of now , please ask unrelated question in email , not on comments section .

      Manish

    2. @ Prateek

      These are 10 year Zero Coupon Bond. (Will be listed on exchange for trading)

      You need to invest Rs 9500(face value) a bond & maturity will be Rs 20000 per bond. Pre-tax yield comes out to be 7.7%. But being a zero coupon bond tax will not be on interest but will be like capital gain with benefit of indexation. (App. after tax yield 7.22%)

      Some time back these bond were available at face value of Rs 8500.

      Still have some query, feel free to ask.

      1. Hemant

        Thanks for the clarification .

        Manish

  39. Manish says:

    Good article ……….. Explanation is soo simple dat even Novice can understand i had read some articles on reverse Mortgage earlier also but they were bit confusing Its very simple article 🙂

    1. Manish

      Nice to hear that . Forward the article to more people you know 🙂

      Manish

  40. Venshu says:

    Informative article Manish.

    Reverse Mortgage is still in it’s infancy in India. One of the issues with RM could be that a lot of parents transfer the rights to thier house / property to their children quite early in life and do not hold on to the property / house till they die. The parents should be educated / encouraged not to transfer the property to their children or atleast hold onto one house till their death so the parent(s) can opt for reverse mortgage if required especially if the children are not supporting them financially.

    Venshu

    1. Venshu

      Yes , the emotional reasons can be in abundance , apart from psychological issues like “Ghar mera mandir” and pressure from children .

      Manish

  41. Jitendra Solanki says:

    Great Article!

    In my view Reverse Mortgage will slowly catch Up and will become an important toll for retirement.The only Factor because of which investors do not consider it is Unawareness,Once more companies come in the reach will increase and so the awareness.And not to forget Financial Planners will play a big role in thsi-reason you don’t have many agents to market it.

    1. Jitendra

      Yup , Apart from unawareness I think another reason is that there is small section of people who are above 60 and own a house in big cities . what do you say ?

      Manish

  42. Dolly Mirchandani says:

    In the above examples, it is said that the value of the house once given for reverse mortgage is going to appreciate. is it 100% necessary that the rates/prices of the house are going to increase and not decrease. Also, what if the outstanding loan amount is greater than the price received from selling/auctioning of the property (after the senior citizen dies and he has not legal heir)?

    1. Dolly

      Thats the risk Bank takes if they want to make money out of loan , Reverse Mortgage is a long term affair and over 10-15 yrs the prices are expected to increase only , dont you think so ?

      Manish

  43. Ajay says:

    Let me bookmark it… I will use it when I am 60 🙂

    1. Ajay

      Hmm . may be you want to send this article to all your friends whose parents can use this information .

      Manish

  44. Superb!!

    It will definitely clear the doubts/myths from the mind of various readers.

    Flow chart is AMAZING.

    If you would like you can add this aspect:
    “Star Union Dai-ichi offers annuity cover with reverse mortgage

    When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “

    1. Hemant

      thanks , I added your tip in the article .

      Manish

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