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 pay-out 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
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 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.
How Do I Pay Back a Reverse Mortgage?
A reverse mortgage allows homeowners 62 and older to convert a portion of their home equity into usable funds without having to repay the loan for as long as the loan obligations are met. One, the fact that reverse mortgages do not require monthly mortgage payments. Two, often leaves potential borrowers with questions about when the loan needs to be repaid.
The list below provides answers to common questions about how to pay back a reverse mortgage.
When does my reverse mortgage become due?
A reverse mortgage becomes due when the borrower fails to meet the loan obligations or no longer occupies the home as their primary residence. The loan obligations require the borrower to pay for their own homeowners’ insurance, property taxes, and maintain their home in accordance with guidelines mandated by the Department of Housing and Urban Development.1 As long as these terms are met; monthly mortgage payments are not required.
What happens when I pass away?
When the last reverse mortgage borrower passes away, the loan becomes due. The heirs of the borrower have a few choices when it comes to repaying the loan. Heirs can sell the home to pay off the loan balance and retain any excess equity. Or, if they want to keep the home, they can refinance the loan, or pay it off out of pocket.
In the event the loan balance is greater than the value of the home, the heirs can either arrange to voluntarily turn over ownership of the property to the lender (deed in lieu of foreclosure), or buy the home at 95% of the appraised value.
What happens if I sell my home or move out?
When a borrower sells their home or moves out, their loan obligations are no longer being met. This means that the loan becomes due. Borrowers can use the proceeds from the sale of their home to pay off their reverse mortgage loan.
It is important to note that a mortgage is a non-recourse loan, which means that the lender cannot look to other assets for repayment.
If you are a homeowner, 62 or older, and looking for a way to supplement your retirement income a reverse mortgage may be right for you.
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 instalments 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.
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 counsellor 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.
Dilzer Consultants Pvt Ltd