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The Union Budget 2007-2008 proposed to introduce Reverse Mortgage scheme for senior citizens which would allow them to generate income from their residential properties even as they continue to occupy it.
What is Reverse Mortgage?
Reverse mortgage is a contract between a home owner and a lending institution- bank or housing finance institution- whereby the home owner borrows against the equity in his home and receives regular tax-free payments from the lender. Equity here means the value of the property over and above any liabilities relating to it.
Under the scheme the capital value of the home is converted into monthly payments over the lifetime of the home owner. These payments become a regular source of income for the senior citizens which can be used to pay their utility bills, medical expenses etc.
The amount of monthly payment depends on the value of the home, the home owner’s age and the prevailing interest rate.
Repayment of Reverse Mortgage
The borrower is not required to repay the loan during his\her lifetime. On his\her death or leaving the home permanently the lender can sell the mortgaged property and recover the loan amount and the accumulated interest. Any excess sum is returned to the heirs of the borrower. In case the value of home falls short of the amount due, the lender is the party at loss.
Benefits
After retirement most senior citizens are left with non-liquid assets and little or no savings. The only option left for them is to sell their home and live off the proceeds. This however is not viable.
- Reverse Mortgage helps them convert their ill-liquid asset (home) into a regular stream of income without having to forgo the shelter over their head.
- This income stream does not get eroded in times of rising-inflation.
- In case the borrower outlives the loan period he\she does not have to vacate the property, only the interest keeps accumulating till the account is settled.
- The borrower can free the mortgaged property mid-term in case of any additional income and accumulation of loan amount.
- If the heirs of the borrower wish to keep the property, they can do so by settling the account of the lender.
The prominent reverse mortgage lenders in India are National Housing Bank, State Bank of India, Punjab National Bank, Indian Bank and Dewan Housing and Finance Limited.
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