Most retired individuals often worry about financial stability after their working years end. The absence of a steady income makes it harder to cover healthcare expenses, daily needs, and basic living costs. Many senior citizens own property but cannot convert it into cash due to its fixed nature. To address this issue, the Central Government introduced the concept of reverse mortgage in the 2007-08 Union Budget, offering a practical solution to this common problem.
A reverse mortgage is the opposite of a regular home loan. In a standard mortgage, an individual pays a bank in regular instalments to own a property. In a reverse mortgage, a senior citizen who owns a home but lacks a steady income can give the property to a financial institution in exchange for regular payments. These payments help cover daily expenses and medical needs.
The borrower remains the owner of the house and does not have to move out during their lifetime. The loan does not need to be repaid as long as the borrower is alive. After their death, the bank or financial institution sells the property. Any extra amount left after repaying the loan goes to the legal heirs.
Reverse mortgages offer senior citizens a way to live independently without being financially dependent on their children. They also protect them from the risk of fluctuating rent or property values.
While reverse mortgage has practical benefits, it faces challenges in India. Many older parents prefer to transfer property to their children, which makes them reluctant to use this option. There is also a lack of awareness about how the reverse mortgage system works.
Additionally, reverse mortgage has a higher starting cost than other types of loans. These costs become part of the loan amount and increase over time. Another issue comes from the changing nature of property prices and interest rates, which affect the total value of the loan.
Loan-to-value ratio decides how much money a bank will give in exchange for the property. In India, this usually ranges from 60% to 75% of the property’s market value. The older the borrower, the higher the ratio offered. This ratio ensures enough value is left in the property at the end of the loan period to cover repayment and avoid any legal confusion.
Reverse mortgage schemes in India offer different tenure choices, including fixed-term loans or lifetime payouts. In a fixed term, monthly payments continue for a certain number of years. In a lifetime payout option, the borrower receives money till they are alive. Financial institutions choose the option based on the borrower’s age, health, and property value.
Property valuation plays a major role in reverse mortgages. A certified valuer assesses the house's market worth before approving the loan. This evaluation takes into account the property’s location, age, construction quality, and current market trends. Based on this report, the financial institution sets the loan amount and disbursement terms.
The regular monthly payments received under a reverse mortgage are not considered income, so they are not taxable under Indian law. This offers a tax-free cash flow for the senior citizens. However, when the property is sold to repay the loan, capital gains tax may apply depending on the value change from when the property was bought.
Repayment of a reverse mortgage usually starts after the borrower dies or permanently moves out of the house. The financial institution then sells the property to recover the loan. If the sale value is more than the loan amount, the remaining sum is given to the legal heirs. In case the property does not cover the loan value, the bank bears the loss and does not demand extra payment from the heirs.
Reverse mortgages allow senior citizens to access the value of their property without selling it or moving out. They provide peace of mind by providing a regular income and reduce dependence on others. Although they have some drawbacks and are still not widely adopted in India, more awareness and better regulations can make them a reliable support system for older adults in the coming years.