How it works
A 60-year-old retired individual opting for SBI’s reverse mortgage plan on his house valued at Rs 10 lakh, will get Rs Rs 2,025 a month
Value of the house	Rs 10 lakh
Maximum sanctioned loan	Rs 9 lakh
Reverse mortgage tenure	15 years
Indicated interest rate	10.75% a year
What you get a month	Rs 2,025
If you were to borrow Rs 9 lakh, you would repay Rs 10,088 a month. Seemingly, reverse mortgage earns much less. But remember you and your spouse have the house for lifetime. If you had sold the house you would have earned more but would have paid rent too

You’ve spent much of your working life earning to build some security for yourself and family in your sunset years. But what if your best-laid plans come undone and you’re left with only a house of your own and little money coming in? You could, of course, sell the property, but we all know what happens during distress sales. “Till recently, there were no avenues for unlocking equity in a residential property into a steady income stream for the owners—predominantly individuals who have either reached the end of their working life or have recently entered the retirement phase. The answer to this problem is a financial scheme called reverse mortgage,” says Shivkumar Mani, director (marketing), Dewan Housing.

The concept of reverse mortgage was introduced to the country only in 2006. The scheme allows senior citizens to unlock the value of their most valuable asset, their home, by mortgaging it and enjoying the use of the money in their lifetime, while continuing to live in it until their deaths. It helps them benefit from the long-term appreciation of their house as a tangible asset by turning it into a source of much needed funds, post-retirement.

Essentially, in a reverse mortgage scheme, a bank offers a loan based on the value of the property. You get the money in instalments, and upon your death, the bank takes ownership of the property. The amount of loan depends on the value of your property as evaluated by the bank.

Banks consider 40-90% of the property value for giving monthly or lump-sum payments under the reverse mortgage scheme. Banks also have an upper limit (usually Rs 1 crore) of the loan amount. This amount includes the interest accrued on the reverse mortgage loan that you take. For instance, while the upper limit for Indian Bank is Rs 1 crore, the maximum amount that a borrower can get after accounting for interest rates is only Rs 40 lakh.

Even after you take a loan, the property is valued by the bank at regular intervals of three-five years. If the valuation of your property has increased, you are given the option of increasing the quantum of the loan, and should you do so, you will be given the incremental amount in lump sum. If you have opted for the monthly payment scheme, this amount is appropriately increased. If the value of property falls, the bank may revise the payments accordingly too and if the borrower does not accept the revised terms, no further payments are made by the bank and interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan.

If you choose to sell your property, you will have to pay the bank all the accrued amounts. On the death of the second of the two spouses, the heirs to the property decide to either redeem the loan (and keep the property), or sell the property and take the residual amount that may accrue from the sale after settling with the bank. Should the sale proceeds be lower than the accrued principal plus interest, the bank takes the loss. (This could happen if the real estate market has not moved up in the manner the bank had estimated originally.)

What your House can Pay you
ASSUMPTIONS: Age of the borrower: 60 years Tenure: 15 years
	MONTHLY PAYMENT (RS)
PROPERTY VALUE	SBI	PNB	DEWAN HOUSING	BOB
Rs 20 lakh	4,050	3,840	3,366	3,520
Rs 40 lakh	8,100	7,680	6,732	7,040
Rs 60 lakh	12,150	11,520	10,098	10,560
Rs 1 crore	20,250	19,200	16,830	17,595
Interest Rate	10.75% fixed	10% fixed	12% floating	11% fixed
Processing Charge	0.5% of loan amount, minimum Rs 500; maximum Rs 10,000	Half month’s loan instalment subject to maximum of Rs 15,000	1.5% of sanctioned amount	0.2% of loan amount; maximum Rs 10,000
LIC Housing Finance, Allahabad Bank, Indian Bank, Central Bank also offer reverse mortgage

Reverse mortgage loans also come with certain terms and conditions and if they are not fulfilled the bank may foreclose the loan. For example, if the borrower has not stayed in the property for a continuous period of one year or if he fails to pay property taxes or maintain and repair the residential property or fails to keep the home insured, the bank reserves the right to foreclose the loan For all its attractions, the reverse mortgage scheme failed to do as well as expected. According to the National Housing Bank, only about 150 people have taken advantage of the facility since its inception in 2006. The tepid response was largely because of the uncertainty regarding tax treatment of the money. “Reverse mortgage schemes failed to take-off after being introduced in the previous budget due to a lack of transparency and clarity on these clauses,” says S K Mitter, director and CEO, LIC Housing Finance.

However, after the Budget clarification, which stated that earnings received from reverse mortgage would not be treated as income, there’s likely to be a pick-up in demand. In effect, reverse mortgage would not amount to “transfer” under the provision of the Income Tax Act. Therefore, money received as a loan will not attract any capital gains tax liability.

What remains unclear is how the interest accrued to the lender would be treated for tax purposes. This might be a dampener for banks and might prevent them from aggressively pushing their products, according to experts.

Availability of the product has also been a factor, since banks in smaller areas weren’t prepared to offer it. This should no longer be an issue, as large banks with wide networks, such as the State Bank of India, have begun reverse mortgage.

Another shortcoming of most reverse mortgage schemes is that they are available only for 15-20 years. With increased life expectancy, most borrowers are expected to outlive the term of their reverse mortgage. Under the present schemes, while income dries up after 15 years, borrowers can continue to live in the mortgaged house till he and the spouse is alive, but the lender has a lien on the property.

As the market matures, the product itself will see some innovations. For instance, LIC Housing Finance, which has recently launched its scheme, is looking to combine the reverse mortgage plan with a whole-life annuity.