As a septuagenarian, one doesn’t quite look forward to financial crises, but this is exactly what Ahmedabad-based Joginder Bakshi found himself facing in 1999. After a failed business venture, his retirement nest egg was all but destroyed, but he managed to regain his footing soon after by reverse mortgaging his house with a leading public sector bank.

“I was in a financial mess, but didn’t want to depend on my son, so I decided to mortgage my property. Now, every month, I get a fixed amount from the bank, and the best bit is that I still get to live in my house,” says the 74-year-old Bakshi.

What is reverse mortgage?
For the uninitiated, reverse mortgage is a loan that enables home owners above 60 years of age to convert a part of their self-owned home equity into income without having to sell it. Under the scheme, the bank determines the value of the property and fixes a percentage of its current value as loan amount. This is based on parameters such as the likely lifespan of the senior citizen and his spouse. Typically, the loan amount is 60-70% of the market value of the property. The applicants have the option oftaking the loan as a lump sum or a fixed monthly amount. After the death of the senior citizen, the surviving spouse can continue to occupy the property till his/her demise. The value of the property is periodically reevaluated by both the parties, the owner and the bank. If the valuation has increased, the applicants are given the option of increasing the quantum of the loan.

However, one should be prepared to shell out money for charges like processing, valuation, as well as legal fees for availing of the loan. The processing charges are usually around 0.5% of the loan amount, with the maximum limit of Rs. 10,000. The valuation and legal charges may add up to between Rs. 5,000 and Rs. 10,000 depending on the loan amount.

“The bank has told me that in case of my demise, it will give two options to my heirs. They can choose to pay the outstanding amount, along with the interest component, to redeem the property. Alternatively, the bank will sell off the property to recover its dues and the surplus money, if any, will be passed on to my heirs,” says Bakshi.

Can such properties be sold or rented out?
One of the clauses in a reverse mortgage agreement is that the property in question should be a house that is being used by the borrowers as their principal residence. This implies that renting or leasing the property is not legally possible.
As for selling a reverse mortgaged property, while this is legally permitted, experts advise caution. According to Om Ahuja, CEO, residential services at Jones Lang LaSalle India, those who are considering this move should first compare the total debt incurred with that of the house’s market value. “If the amount owed to the bank is more or less the same as the current market value of the property, or if the positive difference is minimal, it may not make too much sense to undertake such a process,” he explains.

In fact, you may not be able to sell the property if you owe an amount that is close to its value and do not have the financial resources to cover the costs associated with selling the home. However, should the sale proceeds be lower than the accrued principal and interest amount, the bank suffers a loss. This could happen if the real estate market has not moved up in the manner that the bank had initially estimated.

Besides, one must understand the tax implications of selling a reverse mortgaged property. The borrower will have to pay capital gains tax on the profit generated from the sale of the property. However, banks don’t need to pay anything as the property is held as a security for the loan that it has provided. An another crucial consideration is that the loan borrower should have an alternative accommodation before he plans to sell his house. A rule of thumb is to opt for a sale only if the proceeds are large enough to facilitate another accommodation after repaying the loan to the bank. Besides, the transaction should yield enough amount so that it can be invested to fetch reasonable monthly returns.

What about foreclosure?
Financial experts are of the opinion that a senior citizen who has reverse mortgaged his property can easily claim ownership by paying the outstanding sum to the bank. This could be good news for Bakshi, who is keen to free his property as soon as he can drum up sufficient funds for the purpose.
According to S Govindan, general manager (personal banking and operations), Union Bank of India, the pay structure of a reverse mortgage is such that you owe only what you have received of the loan amount till date, along with the interest payable and any fees that the lender may charge. According to bank officials, the institution calculates the interest till the day the principal amount is to be paid. So the interest is calculated on the money taken till date. “Many public-sector banks don’t have a foreclosure charge if you are planning to repay the bank. Some, however, may charge you around 2% on the amount,” adds Govindan.The paperwork is relatively simple. Since all the documents are already with the bank, one doesn’t need to submit any of these again. Says TS Swami, AGM (retail banking), Union Bank of India: “In fact, it is possible to purchase the property by way of a housing loan, if one of the heirs wants to do so. The process is similar to that of buying a mortgaged resale house.”
The heir in question would have to simply clear the earlier loan by paying off the dues, have the house registered in his name, and then apply for a housing loan if he wants to reclaim it.