Reverse Mortgage for CFP
Posted by Prashant Shah on February 12, 2013
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:
- Periodic payments (monthly, quarterly, half-yearly, annual).
- Lump-sum payments.
- 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.
PVS (Prashant V Shah) 
R Varadarajan said
Dear Prashantji,
Thanks for the post. I was desperately looking for your post on RML since the same has been included in the curriculum. Although I had a broad idea, I wanted to know the calculations, which you have very kindly provided in the blog. Thanks for the timely post
Suresh said
Dear All.
Can anyone help me solve the following problem with steps…
Sunil is a young professional ageing 27 years, who has started investing in a ULIP of a Insurance company. His annual contribution is Rs 60,000 in the beginning of the year. He has opted for balanced fund looking at the bear phase of the market. He is optimistic and believes that the market will rise and likewise interested in moving to growth fund, say after 2 years and is considering to a protector fund option 5 years before retirement, which as per his company’s policy is 58 years. Considering rate of return for growth fund be 12 %, balanced fund be 8 % and protector fund be 6 %, what will be the accumulated value of the ULIP if initially, investible amount of the contribution is 70 %, increasing by 10 % for subsequent years?
Manish said
Dear suresh,
check out all the comments of the retirement posts you will get the solution of the stated question.
Harshil Roy said
Hi,
I need clarification on the extension of this question. Let’s say after 4 years the borrower dies. What is the amount repaid by the legal heirs to the Financial institutions assuming the rate if interest on the loan is 15% p.a. if they want to take the home back?
Jasbir singh said
Dear Harshil roy,
According to guidelines given by NHB ( http://www.nhb.org.in/RML/guidelines.php ) satement on settlement of loan is like this
14. Settlement of Loan
The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or to relatives. Typically, a “permanent move” may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. PLIs may obtain such documentary evidence as may be deemed appropriate for the purpose.
Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Residential Property.
If both the borrower dies then it may be termed that now they are not living in the home and settlement will be proceed through total accumulation+interest ( not principle). legal heirs have rights to pay the accumulated loan. There is no such clause where it is written that borrower or his/her legal heirs have to pay principle+interest, its just total accumulation ( the amnt which bank have lend to borrowers + charges+ any other expense done by bank on home like insurance)+ total interest of given period
You can follow the link.
Thanks for asking
Regards
Jasbir singh
Harshil Roy said
Hi Jasbir,
Thanks for the answer, but what you have mentioned is open source material. My question is…. Say… The value of my house currently is Rs. 45,00,000 Rate of Interest is 15% and I want a RML for 20 years… In this case my monthly payment would be
Fv = Rs. 45,00,000
Rate = 15%/12
Nper = 20*12
So, we need to find out PMT, which will be monthly payment to borrower.. let’s say it is Rs. 3005. Now after 4 years if the house is required to be bought back, what is the amount to be paid by the bank.
Harshil Roy said
A small mistake… what is the amount to be paid to the bank?
Jasbir singh said
As I already mention before
total accumulation ( the amnt which bank have lend to borrowers + charges+ any other expense done by bank on home like insurance)+ total interest of given period
Now You can calculate….
Jasbir singh said
It is something we have to determine the Actual amount given by the bank. confusion lies when we say it reverse loan of 45,00,000
if it is paid monthly
pmt=3005
rate =1.25%
n=48
fv=(?) 1,96,011.30
For lump sum
In this case lump sum amount will be 2,74,951.25 Rs
In this case amount to paid after 4 years will be 4,80,891.46 Rs
Regards
Jasbir singh
Anandu said
Can you say how to calculate balance liability of RML
I understood till 196011
How do you get 274951 after that ?
Anandu said
Amount should only be paid at the end.
I have another doubt if 3005 is the payment he received monthly,
What is his liability balance after 4 years ?
The answer I received from Jasbir Sing, I didn’t understand it properly
I got till 196011.
Rest ?
I am asking you because I don’t have an option to replay back to Jasbir Singh
I wish he also sees my replay
preity motiani said
Dear Prashant Sir, I have an exam on Tuesday. I have query regarding reverse mortgage.
Suppose I have taken a reverse mortgage loan. after five years, the valuation of my property has increased. at the time of review, can i ask the lender to increase the monthly payment as valuation has increased. also, how it will be calculated? what effect it have have on the loan amount as well?
please make me understand this through a mathematical example.