Reverse mortgage loans are a popular source of regular income for a number of senior citizens who have registered properties under their name. A reverse mortgage loan is a credit facility that allows home borrowers above 62 years of age to convert a part of the equity on usual home loans into cash. Thus, instead of them paying off the funds to the lender, the lenders pay it back to them. Reverse mortgage loans are likely to get cheaper if the Reserve Bank of India (RBI) agrees upon lowering the risk factor associated with such loans.
Presently, there exists confusion regarding the reverse mortgage loan, whether it should be treated as personal or as a retail loan. As per the sources, the Indian Banks’ Association (IBA) has asked for some clarity regarding the same. In accordance with capital adequacy rules, if the loan amount is Rs 1000, a bank should have Rs 90 as the capital when the weightage is 100%. Furthermore, the capital given could be lower if the weightage for risk is lowered as well.
If we look at the current guidelines, risk weightage assigned by the bank must be 125% point on the personal loan as compared to 75% for retail loans. As we know that individuals are going to avail the reverse mortgage loans & amount borrowed range would be Rs 1 lakh to Rs 50 lakh which is lower so there are good chances that it could fall into personal loan category.
Also, it is believed that any loan taken by an individual is considered as a personal loan when it is not mandatory for the borrower to state the purpose of the loan. Thus there is an end-use of the loan amount, unlike other loans. On the other hand, House and education loans are given to the individuals but only for a pre-specified purpose.
Because of the social angle attached to reverse mortgage loans Bankers feel that these loans should get priority sector status instead of reclassifying reverse mortgages as personal loans. Since these loans don’t generate any sort of income for the bank for the period of 15 years, also, in cases where the bank must sell the property due to the death of the borrower, any amount which exceeds the loan amount is transferred to the nominee.
As per the scheme, the senior citizens are able to earn a monthly income by pledging their homes to the lenders such as a bank or Non-banking financial institutions, or NBFCs. However, the occupancy still remains with the senior citizens for their lifetime. However, at the borrower’s death, the loan amount is recovered along with the accumulated interest rate by selling off the house. Also, the loan can be repaid in another way, if the heir of the occupant agrees to pay off the loan amount along with the accumulated interest rate. In this case, then the house is not sold off. Various lenders such as SBI, PNB, and LIC housing finance corporation amongst others, provide the reverse mortgage loan facility.