Saturday, March 6, 2010

FAQ-reverse mortgage?

 

Q.1.What is reverse mortgage?
When you buy a house through a home loan, every EMI
you pay towards servicing the loan increases your equity in
the house. Once you payoff the loan in full, your equity
in the house is 100 per cent. In reverse mortgage, exactly
the opposite happens. When you pledge your house for
reverse mortgage with a lending institution,
your equity in your own house decreases with every
disbursal that the lending institution makes to you.
Q.2 Which institutions offer reverse
mortgage as a product in India?
Reverse mortgage as a product is fairly new to India.
Dewan Housing Finance was the first institution in the
country to come up with its reverse mortgage product-Saksham.
Since then, most leading lending institutions have come up
with their own reverse mortgage products.
Some of these are State Bank of India, Punjab National Bank,
Bank of Baroda, Central Bank of India, Union Bank of India,
LlC Housing Finance, Indian Bank, Andhra Bank,
Corporation Bank and Canara Bank.
Q.3 What is the eligibility criteria for reverse mortgage?
First, Second you need to have 100 per cent equity in
your should be more than 60 years of age.
If your wife is a co-applicant, she  should be above 58.
Q.4 How do I apply for reverse mortgage?
Once you decide to pledge your house for reverse
gage, you should ideally go to the branch of the bank
with which you have a banking relationship and fill up
the necessary form–provided the bank offersreverse mortgage.
If your bank does not offer reverse mortgage ,
then approach the nearest branch of a bank that
does, and fill up the form.

You will need to furnish your personal and financial
details: details about The property, your legal heirs,
and so on. To authenticate that you own that the property,
you will also need to furnish property papers and a
proof that the house that you are pledging is your residence.
Q.5 How does the lending institution arrive at 
the amount that would be disbursed under the reverse mortgage product?
The qualifying amount of loan will depend on the
realisable value of your property after maintaining a
margin. This margin covers the rate of interest on the
loan and any possible fluctuations in the value of the
property pledged for reverse mortgage.

The value of the property is evaluated every 3-5 years,
depending on the lender, and this will affect the amount of
funds being released to you as per the payment plan you choose.
Q.6  What are the payment options that lending
institutions provide under reverse mortgage?
The money can be credited into your savings bank
account or in a joint account-with the either or survivor
option-in the same bank either on a monthly or quarterly
basis, or as a one-time lump sum payment.
Q.7  What is the rate of interest on the amount 
that the bank sanctions under reverse mortgage?
The rate of interest on the reverse mortgage loan typically
varies between 10 per cent and 12 per cent.

However,
you will not be required to pay this interest.
Once you vacate the premises permanently, or in the
event of your death, the lending institution will give the first
option to the legal heirs of the property to settle the loan.

If they are unable to settle the loan, the lending institution
will sell the property and, from its proceeds take its
share-principal, i.e., the total amount disbursed  as loan
and the interest on it-and give the to the legal heirs.
Q.8 Is there a processing fee?
Yes, There is a processing fee. This typically varies between
0.15 per cent and 1.50 per cent of the loan amount.
In some cases, apart from specifying the percentage
of loan amount as processing fee, they also have an upper
limit as to how much they can charge as processing fee.
Q.9 What is the maximum payment tenure that a
lending institution offers under reverse mortgage?
Most reverse mortgage loan products available have a maximum
tenure of 15 years, with a minimum tenure of 10 years.
However, RML products of central Bank of India andBank
of Baroda can be extended further, to the advance value of the
property. In case of Central Bank of India, the loan can be
further extended by another five years. Punjab National Bank
is the only institution that offers RML for 20 years.
Q.10 Can I prepay the amount that the lending 
institution disburses under reverse mortgage? 
Is there a pre-payment penalty?
Yes, you can prepay the loan along with the interest any
time during the loan tenure. Typically, there is no pre-payment penalty.
Q.11 Is the rate of interest on the RML and the value 
of the house fixed for the entire tenure or are they revised at regular intervals?
Considering that real estate, like any other asset class, passes
through cycles and the cost of funds for lending institutions also
keep changing, most lending institutions have a reset clause
in the their respective RMLs. This is to ensure that at no
point during the loan tenure, the loan to
value ratio exceeds the maximum unlock able value of the
mortgaged property.  However, this reset clause varies across
institutions. While mostlending institutions have a reset clause
of five years, Central Bank of India and Dewan Housing
Finance have a reset clause of three years.
 

So, after the scheduled period, both the value of the house
as well as the rate of interest will be re-evalued and necessary
adjustments will be made in your monthly payments.
Q.12 What if I outlive the tenure? Can I still stay in my house?
In case you outlive your loan tenure, you will continue to live in your house. However, the lending institution may stop the monthly payments to you if the unlock able value of the property has already been exhausted.
Q.13 When will the lending institution take my house?
After your death, or if you have permanently moved out
of the property, the bank will first give your legal heirs an
option to settlethe loan. In case of a joint loan,
it will become due for recovery and payable six months
after death of the last surviving spouse,
Q.14 How does the lending institution recover the money that it has given me under reverse mortgage?
If your legal heirs cannot settle the reverse mortgage loan, t
hen the property will be sold off and after realizing its money
(total advances and the accumulated interest), the bank
will pass on any surplus to your legal heirs.
Q.15When does it make sense to opt for reverse mortgage?
Reverse mortgage should ideally be used to augment one’s income in
the golden days in the retirement years. It should ideally be the
last resort to make good of the shortfall in funds in your retirement years.

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