Reverse Mortgage Loan
Reverse mortgage in simple words means the Exact opposite of the home loan. Anyone who fully owns a house can get a loan. This works in way that the individuals loan money is given to him in EMI over a period of time this in turn can easily act as Monthly income. At the end of the allotted time the bank stops paying money. In the scene where one of the spouse dies the other can still live in the house, If both die the bank gives their heirs – 1) Settle the overall outstanding loan and retain the house or 2) The bank sell the house and uses the money acquired to settle the outstanding loan and gives the rest to the heirs.
Important Points in Reverse Mortgage
• Only Senior citizen’s can apply for the Reverse mortgage. Any individual owner above 60 can apply for reverse mortgage; if the Wife is co-applicant then the age of the wife should be above 58.
• The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
• The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company). Minimum tenure is of 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
• The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
• Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
• One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.
With a reverse home mortgage, no payments are made during the life of the borrower(s).This means the loan has to be paid only after both the borrower and spouse die. As no payments are to be made during the term of the reverse mortgage loan, the loan balance rises as the time grows. In many areas, where the appreciation of property is good, the value of the property grows at a much faster rate than the loan balance ultimately the remaining equity continues to grow.
When both, the borrower and his/her spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have two options- to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains.
Even though Reverse Mortgage seems like a nice and enticing idea, it should not be the primary tool to fund one’s retirement expenses; it shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income in this case one can use reverse mortgage. Reverse mortgage is not yet popular, because of bad/negligible marketing and our mentality, where we don’t prefer to take loan on our most valuable and most emotional asset “our Home”. Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades.