Senior citizens without any steady income can use this scheme
NO REGULAR income, ailing health coupled with no or inadequate savings pose a serious risk to senior citizens. Senior citizens need a regular stream of income to address their financial needs. Seniors with no other option can consider reverse mortgage scheme offered by banks and housing finance companies. However, a reverse mortgage product is risky as it guarantees income only up to 20 years.
In a reverse mortgage scheme, the senior citizen has to mortgage his house with a bank or a housing finance company, which then makes periodic payments to him. The good part is that the senior citizen can continue to stay in his house till his death.
The senior citizen borrower is not required to service the loan during his lifetime and therefore does not have to make monthly repayments of principal and interest to the bank. The loan becomes due and payable only when the last surviving borrower dies or would like to sell the home. On the borrower's death or on the borrower leaving the house property permanently, the bank recovers the principal amount along with the accumulated interest from the proceeds received out of the sale of the property. The balance amount (if remaining) is passed on to his legal heirs. The borrower(s) will have option to prepay the loan at any time during the loan tenure. The heir of the senior citizen can also repay or prepay the loan with accumulated interest and have the mortgage released with out resorting to sale of the property.
Risks associated in a reverse mortgage loan: A senior official of National Housing Bank (NHB) said, A reverse mortgage product has risks. The bank stops making payments to senior citizens who survives the loan tenure. However, the bank cannot make him vacate the house. They have to wait till his death to recover the loan and the interest.
Therefore, we have introduced a second product called reverse mortgage annuity linked product where incase the senior citizen survives the loan tenure, then the insurance company provides him with income.
"So far it's only Star Union Dai-ichi Life insurance that is offering the reverse mortgage linked annuity product. Talks are on with many insurance companies and banks to join hands and launch this product," said the NHB official.
According to the guidelines set by NHB, banks are supposed to re-value the property mortgaged with them at least once in every five years. Thus, the periodic annuity amount would be revised based on the revaluation exercise. Based on the borrowers requirements, the payments can be on a monthly, quarterly or yearly basis. Incase of medical emergencies, the senior citizen can also avail a lumpsum amount that is usually restricted to 50 per cent of the loan amount. The rate of interest in a reverse mortgage product can be fixed or on floating rate basis.
There are three risks in a reverse mortgage product. The risk of the senior citizen living longer than the asset, high inflation eating into the income he earns and rate of interest rising in a floating rate regime.
Conditions for availing reverse mortgage loan: The person should be a senior citizen above 60 years of age and be the owner of a self-acquired, self-occupied residential property. Incase of a married couple the other person should not be below 55 years of age.
Determination of the loan amount: The bank appoints an independent third-party valuer to determine the market value of the residential property. Based on factors such as the age of the borrower and the prevalent interest rate, banks usually lends a maximum 50 per cent of the value of the property which is amortised for a maximum 20 years. However once the tenure of the loan is complete, periodic payments to the senior citizen is stopped.
All payments under reverse mortgage loans are exempted from income tax.
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