How To Make Money From Your Property Without Renting It Out?

Once retired, senior citizens find it difficult to manage their expenses due to lack of a regular income. But those who are retired and have a house of their own can benefit from reverse mortgage loan to get additional monthly income while residing in that property. To cater to asset-rich but cash-starved senior citizens, reverse mortgages were introduced in India in 2007. However, due to lack of popularity, the scheme didn't find many takers.

What is reverse mortgage?

Reverse mortgage is the opposite of home loan. In this type of mortgage, the owner can receive regular monthly income from a lender by pledging the ownership rights of his property. The borrower can stay in the property throughout his lifetime.

If you have decided to pledge your home to the bank, its monetary value is assessed by the lender based on several factors. After deciding on the property value, the bank disburses the loan amount to the borrower in instalments after factoring in margin for interest costs and price fluctuations. These reverse EMIs can be received by the buyer over a fixed tenure. As the borrower starts receiving periodic payment from the lender, the equity of the owner in the house tends to decrease.

Types of reverse mortgages

There are two types of loan available under such mortgages — the usual reverse mortgage loan and the reverse mortgage loan-enabled annuity. If the borrower opts for usual RML, the bank would pay a lump-sum or monthly instalments. In the second option, the RML works like a pension product in which the lender pays the loan amount to the insurance company. The insurer would factor in the actuarial calculation and would give you the pension amount for the rest of your life.

The guidelines

The Reserve Bank of India has formulated certain guidelines for reverse mortgage loans.

• The highest loan amount is capped at 60 per cent of the value of the property.

• The tenure is capped at 20 years while the minimum limit is set at 10 years.

• Banks have to re-evaluate the property every five years.

• The amount received through a reverse mortgage is loan, not income, therefore is non-taxable.

• Reverse mortgage rates can be fixed or floating.

Terms and conditions

• Home owner should be at least 60 years of age while the spouse who can be the co-applicant should be above 58 years.

• Only owners of self-acquired, self-occupied property in India are eligible for a reverse mortgage.

• Property titles should be clear and it should be free from encumbrances.

• The life of property should be not be more than 20 years.

• Owners should be the permanent resident.

How is reverse mortgage settled?

Reverse mortgage loans are capped for 20 years, but if the borrowers outlive the tenure, they can continue to stay in the property. The loan becomes due when the borrower dies or decides to sell his house. In the case of death, the bank gives the first option to the nominee to settle the accumulated loan amount with interest. In case the nominee fails to do so, the bank can recover the amount from the sale proceeds of the property. The additional amount, after the settlement of the loan with interest and expenses, is passed on to the legal heirs. However, if the sale price is less than the accrued interest and total principle, the bank has to bear the loss.

Limitations

• Reverse mortgage loans require lengthy documentation process which is full of hassles and tedious for senior citizens.

• The monthly instalments are fixed, and there is no provision to increase the amount in case of an emergency.  

• The owner has to maintain the property and pay all property-related tax.

• The borrower cannot make any changes in the property that can affect the security of the loan. No new owner or encumbrance can be added on the property title.