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Reverse Mortgage for CFP

As we kntow that Reverse Mortgage has been part of curriculum but seldom the questions are asked. Now we can expect FPSB to put atleast a question on the same as it is an important avenue for the retired to generate regular income.

What is a Reverse Mortgage Loan?

Reverse Mortgage Loan (RML) is a Scheme developed by the National Housing Bank (NHB) to help Senior Citizens (persons above the age of 60 years) to avail of periodical payments from a lender against the mortgage of his/her house while remaining the owner and occupant of the house. The borrowers are not required to service the loan during their lifetime and, therefore, do not make monthly repayments of principal and interest to the lender.

RMLs are extended by Primary Lending Institutions (PLIs), such as Scheduled Banks and Housing Finance Companies (HFCs).

Reverse Mortgage Loan – Salient Features

• The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender
• The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate.
• The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.
• Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once every five years
• All reverse mortgage loan products are expected to carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met
• All payments under RML shall be exempt from income tax under Section 10(43) of the Income-tax Act, 1961

How does a borrower receive money under an RML?

Any or a combination of the following, mutually decided by the house owner and lender:

1. Periodic payments (monthly, quarterly, half-yearly, annual).
2. Lump-sum payments.
3. Committed Line of Credit: The eligible amount of loan will be sanctioned by the lender to the borrower, to be drawn and utilized by the borrower as and when required, under mutually agreeable terms & conditions. The borrower pays interest only as and when applicable and to the extent of the loan amount drawn.

When does an RML become due for repayment?

An RML will become due and payable only when the last surviving borrower dies or permanently moves out of the house. The loan may, however, be liable to foreclosure on the occurrence of certain events of default.

What if the borrower outlives the loan tenure?

The borrower will remain the owner of the house property and need not service the loan during his/her lifetime as long as the property is used as primary residence. Periodic payments under RML will cease after the conclusion of the loan tenure. Interest will accrue until repayment. On death of the borrower or when he/she moves out of the house permanently, the loan will be repaid out of the sale proceeds of the mortgaged house.

What are the various events of default under RML?

• Borrower has not stayed in the property for a continuous period of one year
• Borrower fails to pay property taxes or maintain and repair the residential property or fails to keep the home insured
• If the borrower declares bankruptcy
• If the borrower effects changes in the residential property that affect the security of the loan for the lender
• Owning to perpetration of fraud or misrepresentation by the borrower

Mathematics:

Lets take a quote of Allahabad bank: Rs.1 lakh @11% p.a.

If you take RML for 15 years at the 11% for 1 lakh, you will receive Rs.220 per month. Lets see how it has been arrived.

In RML loan amount is always FV, hence

• FV =1,00,000
• N = 180
• i/y = 11/12
• Pmt (end mode) = ?

Answer is 220.

So retired person will keep receiving 220 per month for 15 years. No repayment thereafter till the time they survive.