- Date : 24/04/2021
- Read: 4 mins
Aimed at senior citizens with a residential property but no financial income, a reverse mortgage comes with caveats attached.
In India, reverse mortgage was introduced in the 2007-08 Union Budget for the benefit of senior citizens. Accordingly, a senior citizen who owns a property but doesn’t have a regular source of income can apply for this. When a property owner avails of a reverse mortgage from a financial institution, they receive a regular amount from the financial institution for a specific duration or till their death, whichever is earlier. In the event of the death of the borrower, the lender can sell the property. The excess amount received, if any, is returned to the legal heir of the borrower.
It must be noted that the borrower foregoes the ownership of the property in exchange for the regular income. so, although it fosters financial independence for senior citizens, the passing of the property to the heir gets ruled out. The heir can however retain the property by paying off the reverse mortgage through other sources.
Taking its unique features and conditions into consideration, here are a few things you may need to look at before availing of a reverse mortgage on your property.
Related: Home equity loan or ‘second mortgage’ demystified
- Inheritance: Parents generally wish to transfer their property to their children. They see the house as a family legacy. A reverse mortgage would mean that their descendants will have to look at a new residence. You may still opt for it if you hope that your children will retain the house by repaying the loan amount. A reverse mortgage is ideal for a couple whose daughter has a successful career in, say, the US, and is unlikely to come back to India. However, the same cannot be said if she lives nearby and the inheritance would be useful for her finances.
- Valuation of the property: The lender decides the value of the property under a reverse mortgage. They may get the valuation done through an internal specialist or an external consultant. The value of the property is one of the factors that decide the amount of loan. Therefore, as a borrower, you should see that the valuation of the house is as per your satisfaction.
- Costs involved: The cost involved in the loan is added to the principal amount and interest charged thereon. Therefore, while availing of a reverse mortgage, you must look at the appraisal fee, assessment fee, origination fee, documentation charges, commitment fees etc. Most of these charges and the rate of interest on the loan are decided by the bank and may therefore be negotiable.
Related: Why legal opinion is important when the property is funded through a home loan?
- Payout: As a regular income source, most senior citizens would want something that would assure lifetime return. Reverse mortgages are for a limited period, and anyone who outlives the loan period can face financial difficulty. Let’s assume that a husband aged 60 and wife aged 58 avail of a reverse mortgage loan for 15 years. If both of them outlive the tenure, their regular income will stop at the age of 75 and 73 respectively. Renting a part of the property, adding a co-owner, or availing of a loan against the property would lead to a default in the reverse mortgage scenario. Even though the property-related income sources run dry, the couple must continue to pay for repairs and maintenance, property taxes, and property insurance.
Related: What is loan against property?
Last words
In countries like the US, reverse mortgage has been much more successful as an old-age income option. It is often used as a temporary source of finances that is foreclosed once the repayment funds are arranged. However, if a borrower is considering reverse mortgage as a long-term income option for their old age, they must take into account all the pros and cons of the loan arrangement thoroughly. What you should know if your developer defaults on bank loan repayment?
In India, reverse mortgage was introduced in the 2007-08 Union Budget for the benefit of senior citizens. Accordingly, a senior citizen who owns a property but doesn’t have a regular source of income can apply for this. When a property owner avails of a reverse mortgage from a financial institution, they receive a regular amount from the financial institution for a specific duration or till their death, whichever is earlier. In the event of the death of the borrower, the lender can sell the property. The excess amount received, if any, is returned to the legal heir of the borrower.
It must be noted that the borrower foregoes the ownership of the property in exchange for the regular income. so, although it fosters financial independence for senior citizens, the passing of the property to the heir gets ruled out. The heir can however retain the property by paying off the reverse mortgage through other sources.
Taking its unique features and conditions into consideration, here are a few things you may need to look at before availing of a reverse mortgage on your property.
Related: Home equity loan or ‘second mortgage’ demystified
- Inheritance: Parents generally wish to transfer their property to their children. They see the house as a family legacy. A reverse mortgage would mean that their descendants will have to look at a new residence. You may still opt for it if you hope that your children will retain the house by repaying the loan amount. A reverse mortgage is ideal for a couple whose daughter has a successful career in, say, the US, and is unlikely to come back to India. However, the same cannot be said if she lives nearby and the inheritance would be useful for her finances.
- Valuation of the property: The lender decides the value of the property under a reverse mortgage. They may get the valuation done through an internal specialist or an external consultant. The value of the property is one of the factors that decide the amount of loan. Therefore, as a borrower, you should see that the valuation of the house is as per your satisfaction.
- Costs involved: The cost involved in the loan is added to the principal amount and interest charged thereon. Therefore, while availing of a reverse mortgage, you must look at the appraisal fee, assessment fee, origination fee, documentation charges, commitment fees etc. Most of these charges and the rate of interest on the loan are decided by the bank and may therefore be negotiable.
Related: Why legal opinion is important when the property is funded through a home loan?
- Payout: As a regular income source, most senior citizens would want something that would assure lifetime return. Reverse mortgages are for a limited period, and anyone who outlives the loan period can face financial difficulty. Let’s assume that a husband aged 60 and wife aged 58 avail of a reverse mortgage loan for 15 years. If both of them outlive the tenure, their regular income will stop at the age of 75 and 73 respectively. Renting a part of the property, adding a co-owner, or availing of a loan against the property would lead to a default in the reverse mortgage scenario. Even though the property-related income sources run dry, the couple must continue to pay for repairs and maintenance, property taxes, and property insurance.
Related: What is loan against property?
Last words
In countries like the US, reverse mortgage has been much more successful as an old-age income option. It is often used as a temporary source of finances that is foreclosed once the repayment funds are arranged. However, if a borrower is considering reverse mortgage as a long-term income option for their old age, they must take into account all the pros and cons of the loan arrangement thoroughly. What you should know if your developer defaults on bank loan repayment?
