I have written numerous articles on retirement planning and why it is critical for everyone and prioritize it. Retirement planning also assumes a greater role now as there are more private jobs with a lesser assurance of having a working life till the official retirement age, faster burnouts in jobs, higher aspirations, increasing life expectancies due to better medical advances, declining interest rates, higher inflation etc. While you can get a loan for the education of your children, I doubt any financial institution would provide a loan for retirement. But what should we do when we are already staring at retirement and have unfortunately not planned for it. Not to worry, there is still some hope if we have managed to secure a house of our own.
What it is?
Reverse Mortgage Loan (RML) is a type of social security product. Senior citizens can encash on the equity of your house in the form of a loan wherein the bank pays an equated monthly installments (EMIs), therefore known as a reverse mortgage. The house in which we continue to stay gets mortgaged to the financial institution.
What are the features?
Currently, reverse mortgages are implemented by most of the public sector banks, housing finance companies, and select private sector banks.
Should be an Indian citizen and above 60 years of age. Married couples are eligible as joint borrows wherein the secondary borrower has to be at least above 55 years old.
Should be a self-acquired and self-occupied house in India with clear title and free form encumbrances.
Residual life of property should be at least 20 years.
Amount of loan which will be offered to senior citizen depends on various factors such as market value of a house, age of borrower (s), interest rate, tenure of loan (maximum 20 years).
Maximum lumpsum payment restricted to 50% of the eligible amount, remaining amount can be disbursed based on desired frequency, capped at a maximum Rs 50,000 monthly.
When does the loan become due?
The loan becomes due and payable only when the last surviving borrower dies or would like to see the home, or move out of the home permanently.
Borrower (s) or the heirs have the first right to settle the loan along with the accumulated interest, without the sale of the property.
If the house is sold, then any surplus after the settlement of the loan with accumulated interest is passed on to the legal heirs or the beneficiaries of the borrower (s).
Is it for you?
We should plan for our retirement by investing regularly in various products considering our risk profile, time horizon and amount needed for funding our retirement. But, while working towards this journey, there can be unexpected derails like major expenses related to health, children, loss of jobs etc which can impact maintaining the same lifestyle during retirement.
Reverse Mortgage Loan, at best, should be considered only as a supplement to your retirement income and should not be planned as the only income to fund your retirement.
How do we go about?
As mentioned earlier, this facility is provided only to senior citizens. Not all banks provide this loan, therefore research needs to be done on the same. Other than the few select banks, any housing finance company registered with the National Housing Bank (www.nhb.org.in) also offer this product.
Just eligibility for the RML does not ensure the availability of the loan. There is a detailed application process to be followed including scrutiny and due diligence of all supporting documents regarding ownership of the property. The amount of the loan which will be disbursed and the interest rate which would be charged would depend based on the assessment by every lender and there could be variation in the same. Most banks allow a maximum of Rs 1 crore loan currently under the RML.
This is one product which is not very popular but is slowly picking up especially with the prevalence of nuclear families culture in the country. It is estimated that by 2020, over 20% of the Indian population would be in the senior citizen category. So, there definitely exists a huge demand for this product, though we should also note that in developed markets like the USA, UK, and Australia, RML has been in existence for a longer time period of time, the RML still golds a minuscule portion of the total home finance market. The regulations regarding RML can change over period and can impact your financial and retirement planning significantly.