Life beings at 60! Reverse Mortgage Loan (RML) can be your gateway to hassle free and dignified life after 60.

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Senior citizens, a term used for people above 60 years of age are a growing population in India. Does that mean giving up on your lifestyle? Or depend on children’s income for fulfilling your basic needs? Well, whatever the logic behind in use of term “senior citizen”, there is no point living a tiring life after retiring actively from employment. In fact, this is the time to visit places, pursue recreational hobbies, learn something new from music instruments to latest in technology. One of the couple we came across in their late 60s is having the time of their life. Visiting various religious places, meditation, public work are some of things that keep them occupied. And there is no pension that they receive from their past employer. So, how do they maintain this exciting lifestyle? Well, to cater to the growing population of people above 60, the financial system including the banks has come up with an instrument called “Reverse Mortgage Loan”.

What is Reverse Mortgage Loan?
As the name suggests, it is the opposite of a normal home loan product. While, in procuring a home loan, you mortgage your property with the bank and pay EMIs so that the home can be yours once all the EMIs are paid. In reverse mortgage loan, the house which belongs to you is mortgaged to the bank or lender and then the lender pays you monthly tax free income without having to sell the house. And it is this tax free income that can allow you the luxury of living a hassle free and dignified life after your retirement at 60.

What happens to my house after the term of the reverse mortgage loan?
One can repay the loan in lump sum at the end of the loan term. Please note that the maximum tenure of the loan is 20 years. As long as you are alive and continue to occupy the house, there is no need to service the loan. However, in case of borrower’s death, lender sells the house and loan is repaid and the remaining amount (if any) is paid to the borrower’s inheritors.

Eligibility criteria:

• Should be Senior Citizen of India above 60 years of age.
• Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the BANK, subject to at least one of them being above 60 years of age and the other not below 55 years of age.
• Should be the owner of a self- acquired, self occupied residential property (house or flat) located in India, with clear title indicating the prospective borrower’s ownership of the property.
• The residential property should be free from any encumbrances.
• The residual life of the property should be at least 20 years.
• The prospective borrowers should use that residential property as permanent primary residence. Permanent primary residence refers to the self acquired, self occupied residential property where a person spends majority of his time. Factors that may be relevant in this regard include the address used for general correspondence, utility bills, Bank statements, tax return, Bank accounts and Banking relations etc. However, all facts and circumstances may be considered for the purpose of determining that the residential property is the permanent primary residence of the borrower.

How much amount can be availed?

• The amount of loan will depend on market value of residential property, as assessed by the BANK, age of borrower(s), and prevalent interest rate.
• The Banks will have the discretion to determine the eligible quantum of loan reckoning the ‘no negative equity guarantee’ being provided by the BANK. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower.
• The Banks would ensure that the equity of the borrower in the residential property (Equity to Value Ratio - EVR) does not at any time during the tenor of the loan fall below 10%.
• The Banks will need to re-value the property mortgaged to them at intervals that may be fixed by the BANK depending upon the location of the property, its physical state etc. Such revaluation may be done at least once every five years; the quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender.

How are the payments made to you by the lender?

• Any or a combination of the following:
• Periodic payments (monthly, quarterly, half-yearly, annual) to be decided mutually between the BANK and the borrower upfront
• Lump-sum payments in one or more tranches
• Committed Line of Credit, with an availability period agreed upon mutually, to be drawn down by the borrower
• The maximum monthly payments shall be capped at Rs.50,000/- or such other amount as may be notified by the Government of India.
• Lump-sum payments may be conditional and limited to medical exigencies.
• The maximum lump-sum payment shall be restricted to 50% of the total eligible amount of loan subject to a cap of Rs.15 lakh or such other amount as may be notified by the Government of India, to be used for medical treatment for self, spouse and dependents, if any. The balance loan amount would be eligible for periodic payments.
• The nature of payments will be decided in advance as part of the Reverse Mortgage Loan covenants. BANK at their discretion may consider providing for options to the borrower to change. All covenants/ conditions stipulated by the Banks shall be disclosed to the borrower in advance.

How can funds be used?

• The loan amount can be used for the following purposes:
• Up gradation, renovation and extension of residential property.
• For uses associated with home improvement, maintenance/insurance of residential property
• Medical, emergency expenditure for maintenance of family
• For supplementing pension/other income
• Meeting any other genuine need
• Use of Reverse Mortgage Loan for speculative, trading and business purposes shall not be permitted

Source: National Housing Bank

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How to calculate Reverse Mortgage Loan Monthly Payments?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

In our previous post, we covered the concept of Reverse Mortgage Loan (RML). We covered elements such as definition of Reverse mortgage Loan, eligibility criteria, amount that can be availed, and modes & nature of payments.

People from across the country showed substantial interest in Reverse Mortgage Loan.  And there were queries from ‘formula to calculate monthly payment’ to ‘paying the amount back to bank’. We cover all of this below:

Installment Amount = ((PV*LTVR-OTDA)*I)/ (((1+I)^n)-1)

Where, PV=Property Value;
LTVR=LTV Ratio;
OTDA=One Time Disbursement Amount;
n=No. Of Installment Payments;
I= the value of 'I' will depend on Disbursement Frequency selected.

For Example,
Property Value (PV) = 10, 00,000
LTV Ratio (LTVR) =80%
One Time Disbursement Amount (OTDA) =0
Loan Disbursement Period=15 Years
Disbursement Frequency=Monthly
Interest Rate (IR) = 9.25 %

Calculations: On the basis of the inputs:
The disbursement frequency selected is Monthly so 'I' will be IR/12(i.e. 9.25%/12)
No. of installment payments (n) will be calculated monthly e.g. if 15 is selected then the n=15*12=180
Putting the values in the formula:
Installment Amount=Rs.2, 070;


Here is a detailed example of Mr. Sharma, 62 years of age and own a property worth Rupees 1.5 Crores in Gurgaon. Mr. Sharma lives with his wife 59 years of age. Both his sons are married and settled abroad. On knowing about the merits of Reverse Mortgage Loan (RML), Mr. Sharma decided to check on the eligibility and monthly payment that he will be getting.

While he is clearly eligible for the same (find Reverse Mortgage Loan Eligibility criteria), he found it rather cumbersome to calculate the monthly payment that he will receive.

Property Value PV = 1.5 Crores (15000000)
Loan to Value Ratio (LTVR) = 80% (As specified by RBI)
One Time Disbursement Amount (OTDA) = 0 (No amount is disbursed in one go, instead banks pay monthly payments to applicant)
Loan Disbursement Period (n) = 15 years or 180 months
Disbursement frequency = Monthly
Current Interest Rate (I) = 10.25% yearly or (10.25/12)% = 0.854167% monthly

Calculating the monthly installment amount by putting all these value in given formula in excel:
Installment Amount = (((PV*LTVR)-OTDA)*I)/ (((1+I)^n)-1)
Installment amount = 28294

So, Mr. Sharma will be getting a monthly payment of Rupees 28294 for 15 years. Upon completion of 15 years, Mr. Sharma can either extend his Reverse Mortgage Loan (RML) payments or pay the outstanding amount to bank to get back his house.

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