Senior citizen & need a loan? Reverse mortgage

Can banks refuse to give loans to senior citizens? What are other options if banks reject? We find answers to your questions. We also find alternatives for you.

I am 72 years of age. I am a Government retiree earning a pension of around Rs 16,000 per month. My wife and I live in a three-bed room flat, which is jointly owned by us, and there is no encumbrance. Our flat is worth over Rs 40 lakh.

I approached my bank for a loan of Rs 16 lakh against the property. They refused to give me a loan and didn’t give me a straight answer either.

Is there any policy guideline from the Reserve Bank of India or the Government that states that banks cannot give loans to senior citizens even if the loan is fully protected by the collateral security offered?

You have approached your bank for a secure loan with your home as collateral. Nevertheless, banks cannot offer you a loan against your property unless your regular income is equivalent to the repayment capacity for the loan you seek.

Your repayment capacity

The loan is given as a certain percentage of the property's market value, usually, around 40 per cent to 60 per cent.

That is:

You are eligible for: Rs 16 lakh loan amount (40 per cent of 40 lakh)

Maximum loan tenure a bank will provide: 15 years.

Monthly EMI: Rs 18,000

Your monthly EMI is more than 100 per cent of your current income of Rs 16,000 per month.

Result: Banks do not offer loans, where your EMI exceeds 50 per cent of your monthly income. Hence a loan against property (LAP) may not be possible.

What are my options?

1. Pledge a part of the value of your property instead of pledging the entire property.

You’ll procure a much lesser loan amount but it will not exceed 50 per cent of your current income.

2. Pledge investments, like shares, securities, fixed deposits, insurance policies, provident fund account etc, as collateral and obtain a loan against them.

For instance, you can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than 5 years.

3. Check the possibility of special loan schemes for pensioners

Several public sector unit banks offer special loan schemes against the pension amount you avail on a monthly basis. They might give a loan that does not exceed x times your pension amount with significantly lower interest rates compared to regular rack rates.