Every working individual wants to spend his retirement life with dignity. If you are also about to reach your retirement or you are in the retirement period, you may be looking for a way to fund your lifestyle without depending on anyone. One of the effective ways to earn a regular income for pensioners is a Reverse Mortgage.
What is a Reverse Mortgage?
A reverse mortgage loan (RML) is an exclusive offer for the persons who are more than 60 years old and owns a residential property. This is a plan for the asset-rich-but-cash-poor senior citizens. This plan was introduced in India in the year 2007 but till today there are only a few who have availed this facility. In a reverse mortgage, instead of the homeowner pays EMIs to the lender, the lender makes payments to the homeowner in installments.
How Does a Reverse Mortgage Work?
A reverse mortgage is just the opposite of a mortgage loan. At the beginning of a mortgage loan, the bank is the sole owner of the property and with the payment of every EMI, the equity of the property transfers to the borrower’s name. But in a reverse mortgage, the entire equity of the home is owned by the borrower at the beginning. The bank grants a loan against the property which is divided into equal parts and pays the borrower installments. One doesn’t need to pay back the loan in his lifetime. At the death of the borrower either the heir of the property can pay back the loan or the lender will sell the property to get back the borrowed amount.
Features of a Reverse Mortgage
- One can avail a maximum of 60% of the property value as reverse mortgage. The property value depends on the current market conditions.
- The maximum amount one can avail is Rs. 50 lakhs to Rs. 2 Cr. The amount differs from bank to bank.
- The minimum duration of this loan is 10 years and the maximum is 15 to 20 years, again depends on the bank.
- The payout options that can be availed are monthly, quarterly, half yearly, yearly or lump sum. In case of a lump sum, not more than 50% of the property value is given as the loan. The lump sum payment is approved by the bank only in case of medical emergency of the borrower, borrower’s spouse or any dependent.
- The property revaluation is done at the end of every 5 years. If the price of the property increases, the borrower is eligible for an additional loan.
- One has to make a will to avail a reverse mortgage.
- To refinance a reverse mortgage, one has to pay 1% to 2% of the outstanding amount as pre-closure charges.
- The maximum monthly payment one can receive from a reverse mortgage is Rs. 50,000
Pros and Cons of Reverse Mortgage
Just like any other kind of credit, a reverse mortgage also contains some pros and cons. Let us first look at the
Advantages of a Reverse Mortgage Loan
- A reverse mortgage is a regular source of income for the retirees.
- The installments which you receive by a reverse mortgage are tax-free as it is not considered as income.
- The borrower can repay the loan before tenure the without any charges.
- One can continue to live in the same house even after the tenure exhausts and till the death of the borrower and the co-borrower.
Disadvantages of a Reverse Mortgage
- If you avail a reverse mortgage, you or your heir will lose the ownership of the house once the tenure ends.
- One can avail only 60% of the property price as a reverse mortgage.
- The processing fee for availing a reverse mortgage is higher than other mortgage loans.
- As the home equity is used for a regular income, fewer assets are available to leave to your heirs.
Who is Eligible for a Reverse Mortgage?
There are a few criteria which homeowner and the property should meet to be eligible for a reverse mortgage.
- To avail a reverse mortgage the primary borrower must be more than 60 years old. If the loan is applied jointly with the spouse then the spouse must be 55 years or more to be eligible for the loan.
- The property on which reverse mortgage is applied must be self-acquired by the owner. A property should not be inherited or a gift from someone.
- The house against which a reverse mortgage is applied must be self-occupied.
- The house should be in India and the titles of the house must be clear.
- The house must be a permanent primary residence.
- There should not be any existing liabilities on the house.
- The house must have a life of minimum 20 years.
The Foreclosure of the Loan By the Lender
A risk associated with a reverse mortgage is the foreclosure of the same by the lender. The lender can close the loan and sell it before the tenure ends if the borrower cannot meet certain conditions. Failing to meet these conditions allows the lender to foreclose the loan. Here are the conditions when a foreclosure of a reverse mortgage is done.
- If the homeowner doesn’t stay at the home for more than a year.
- If the borrower doesn’t pay property tax and insures the house.
- If the maintenance of the house is not done in the right way which causes the fall of the property price.
- If the borrower declares himself bankrupt.
- If the property is donated or the owner abandons it.
- If the government condemns the property for health or security reasons.
The Closure of a Reverse Mortgage
A reverse mortgage becomes due when the last borrower dies. A chance will be given to the legal heirs to pay off the loan with the accumulated interest to occupy the house. If the heirs are unable to do so, the bank sells the property. If the price of the property is more than the loan value, the extra amount will be passed to the legal heirs which will be taken as a taxable income.
The Bottom Line
A reverse mortgage can be a helpful financial tool for the senior homeowners. But it is seen that most of the Indian senior citizens avoid this tool as they get an emotional attachment with the house they live in and they want to leave some property for their heirs. But the persons with no legal heirs should use this financing option.
The reverse mortgage in India is issued by a few lenders such as SBI, Axis Bank, IDBI, Union Bank of India etc. A reverse mortgage is a complicated product the advice of expert financial counselor should be taken prior to avail this loan. The borrowers must educate themselves about all the aspects of this loan so that they can make the best decision on the use of the equity of their home.
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