What Are The Pros And Cons Of Reverse Mortgage

I retired from the private sector in 2006 and have only my provident fund to take care of myself and my wife. My wife is also retired and has only her bank savings. I am considering taking a reverse mortgage on my 3BHK house to have some financial liquidity. How should I proceed? I own the house and repaid the home loan entirely while in service. I have no outstanding debt, no other source of income, as well as cannot give my house on rent.

A few banks, such as the National Housing Bank (NHB), State Bank of India (SBI), Punjab National Bank (PNB), Central Bank of India, Indian Bank, Andhra Bank, Dewan Housing Finance Limited (DHFL), LlC Housing Finance, Corporation Bank and Canara Bank offer reverse mortgage loans.

Given that India doesn't have a social security system, and as you have mentioned, you do not have any other asset to fall back upon, a reverse mortgage will give you some liquidity for unplanned expenses, such as a medical emergency.

Here are some things to keep in mind:

• Anyone aged 60 years and above with a spouse aged 58 and above can take a reverse mortgage loan.
• Your spouse can be a co-borrower if she is above 55 years of age.
• The maximum amount offered is Rs 1 crore.
• The loan amount depends on the borrower's age and the prevailing interest rate.
• The minimum tenure is 10 years, and the maximum is 20 years.
• The property must be owned by you, not rented, and you should use it as your primary residence.
• You cannot take a reverse mortgage on a commercial property.
• The residual life of the property should be at least 20 years.
• Banks could levy processing fees, including stamp duty, property insurance, GST charges, etc.
• You can repay your reverse mortgage loan without attracting penalties.
• The property valuation is done every five years.
• If you want to renovate your home, you need to seek permission from the bank.
• Lastly, you can opt for monthly, quarterly, half-yearly, yearly, or lump sum payouts.
• To take a reverse mortgage loan, you must submit the following documents to the bank.
• Proof of identity
• Proof of residence or address
• Property papers
• Account statement of last six months for all bank accounts held
• Loan account statement of the last one year (if any)
• Any other document the bank asks for
• A reverse mortgage loan will provide you with tax benefits too.
• Income you receive is not taxable.
• Any renovation expenses can be considered deductible expenses in the computation of income.
• Repayment of the loan will not be considered deductible. 

That said, there are some major drawbacks to a reverse mortgage.

• The monthly amount is fixed, and there is no provision to increase it to cover rising inflation.
• A margin of 15-20 per cent is considered on property valuation. So, if the property is Rs 1 crore, you will receive Rs 80 as a loan. But there is a catch. Since there is loan repayment, the interest component is also included in the loan amount.
• So, on a loan of Rs 80 lakh, considering a rate of interest of Rs 8.5 per cent over a 20-year tenure, the interest component will come to Rs 45 lakh, and you will receive only Rs 35 lakh as a payout. Also, note this will be given as a monthly payout. If you choose to withdraw it as a lump sum, the payout will be 50 per cent of the loan amount or Rs 15 lakh, whichever is higher, and that too is subject to a medical emergency of self or spouse.
• After the borrower's demise, the property will be sold, and if the valuation is higher than the loan amount, the balance will be returned to the legal heirs.
• The legal heirs can also repay the loan.

Given these drawbacks, you could consider selling the house and moving to a smaller one. Then, after paying capital gains tax, you could invest the surplus in a fixed deposit or a systematic withdrawal plan. Not only will your capital remain intact, but you will also earn interest income on your deposit.
 

Hina Shah, Certified Financial Planner CM

Ashok Dixit

I took a home loan in 2015. I have received some extra bonuses and want to prepay a part of my outstanding loan, but the bank is asking for penalty charges. Are they within their legal rights to ask for it? Also, they had given me a choice whether to increase the equated monthly instalment (EMI) tenure. I chose the former and informed them that I would want to repay the loan and asked whether they could reduce the EMI further. Should I change my bank?

The bank is within its legal right to levy a penalty if the prepayment penalty clause is included in your home loan agreement.

If you want to prepay your loan, consider how you would like to proceed, either by reducing the tenure or the EMI by paying a lump sum.

If you are planning to change your bank, consider the foreclosure charge and the processing fee you would pay to your existing and new bank, respectively. And also factor in the rate of interest.

Also, consider the tax benefits you are availing yourself under Section 80C for principal repayment and under sections 24, 80 EE, or 80 EEA for payment of interest on your home loan.

Uma S Chander, Certified Financial Planner CM