Monday, 20 March 2017

Reverse Mortgage and Financial Independence of Senior Citizen

The financial services are undergoing transformation in current scenario and there is an upsurge of a whole new set of services one of them being Reverse Mortgage. The service was introduced by the Union Government in 2007 and has been aiming to give quality life to senior citizens. The service not only provides regular stream of income to old age people but also gives them an opportunity to live with dignity without being dependent on their near and dear ones.

This service is primarily the opposite of a traditional home loan. It gives an opportunity to a senior citizen to have regular income from the bank against mortgage of his house property. The borrower receives a fixed income from the mortgage and continues to stay in the house till his death.

The phenomenon initiates when the home even if of illiquid nature pledged by a senior citizen in exchange of regular payment to a bank. The bank evaluates the monetary value of the property by considering the demand for the property, prevailing property price and current condition of the house. The bank then provides a loan amount to the borrower after taking into account a margin for interest cost and price fluctuations over fixed loan tenure. With the payment of every installment of reverse EMI the individuals interest in loan decreases. The settlement of the loan happens on the demise of the borrower and borrower’s spouse. To settle the loan the bank first provides an option to next of kin to repay the loan along with accumulated interest. In case of disinterest or incapability of the individual the bank recovers its due from sale proceeds of the property. The excess amount left after the settlement of the loan with accrued interest and expenses, is passed on to the legal heirs. In case of sale, if sale proceeds are lower than the accrued principal and interest amount, the bank bears the loss of the amount that it could not recover. Such a loss generally arises where the bank makes an incorrect estimation of property valuation at the time of providing the mortgage as compared to the existing real estate market prices. The reverse mortgage interest rates could be fixed or floating and is determined by benchmark set by prevailing interest rates. The amount received through reverse mortgage does not attract taxes as it is considered as loan. Although a borrower is liable to capital gain tax at the time of sale of the mortgaged property by the bank for the purpose of recovering the loan.

Although very promising but the concept has certain issues within that need to be looked into, like the documentation process is lengthy and brings inconvenience to the applicant, besides the monthly payments are in annuity and are not subject to any increase even in case of emergencies. Despite of all its shortcomings, the reverse mortgage is ideal to supplement a senior citizen’s income in the post retirement age.

Dr. Deergha Sharma
Assistant Professor
Dept. of Management Studies

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