When a person buys a house through s home loan, every EMI that he pays towards servicing the loan increases his equity in the house. Once he pays off the loan in full, his equity in the house is 100%. In a reverse mortgage, exactly the opposite happens.
When he pledges his house for a reverse mortgage with a lending institution, his equity in his own house decreases with every discourse that the lending institution makes to him.
A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. A reverse mortgage, as its name suggests, is exactly the opposite of a typical mortgage, such as a loan home loan.
A reverse mortgage is a home loan product designed for the senior citizens by converting their fixed assset – their home or in banking terms their equity in any house property into an income channle without having to liquidity his equity in case of any requirement.
Benefits of Reverse Mortgage
Following are the advantages of reverse mortgages:
1. No Monthly Payments
The loan is repaid by the sale or refinancing of the home.
2. No Downside
With a reverse mortgage, people will never owe more than the value of their home at the time the loan is repaid, even if the reverse mortgage lenders have paid more money than the value of the home.
This is a particularly useful advantage if people secure a reverse mortgage and then home price declines.
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3. Tax Frees
As a reverse mortgage is a loan, the money from it is typically tax-free, whether people receive it as fixed income or in a lump sum.
4. Flexible Payment Options
Depending on the type of loan, people can receive the reverse mortgage loan money in the form of a lump sum, annuity, or credit line.
5. Easy Pre Qualifications
There are no income qualifications to get a reverse mortgage.
6. Home Ownership
With a reverse mortgage, people retain homeownership and the ability to live in their homes.
As such they are still required to keep up insurance, property taxes, and maintenance for their home.
7. Guaranteed Place to Live
People can live in their homes for as long as they want when they secure a reverse mortgage.
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8. Asset Protection
At the end of the reverse mortgage, the amount that must be paid is the sum of the actual funds received or advanced for fees, plus accrued interest.
The repayment amount will never exceed the value of the home, as long as the property is sold to pay back the reverse mortgage.
Problems of Reverse Mortgage
Following are the problems of a reverse mortgage:
1. Highly Expensive
It is expensive. Reverse mortgages can cost 25000 or kore to enter into, as compared with other types of loans which often cost less than 15000.
2. Low Transparency
Customers are confused while entering into them.
Many seniors entering into reverse mortgages do not fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this.
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3. Critical Interest Calculations
Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance.
Each month, interest s calculated not only on the principal amount received by the borrower but on the interest previously assessed on the loan.
Because of this compound interest, the longer a senior has reverse mortgage, the more likely it is that all o the home equity will be depleted when the becomes due.
4. Lack of Awareness
Recent reports seem to indicate that very small percentages of senior citizens only seem to have taken advantage of the facility since its inception.
This could be perhaps because better awareness had not been created about the product.
5. Limited Capacities
The Indian banking industry caps the available loan amount at 10 lac, instead of providing for an equitable percentage of the property’s value and limits the loan period to a tenure of 15 years.
6. Evolving Product
The product is still evolving and may take on new dimensions depending on how the banks ish to present its consumer appeal.
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Features of Reverse Mortgage
Reverse mortgage consists of the following features:
1. Dealing Parties
Reverse mortgage loan involves two parties:
- Borrower: The senior citizen.
- Lender: Any bank or housing finance institution.
2. Security for the Lender
The borrower pledges their home property to a lender.
3. Payment of the Loan to the Borrower
In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower’s lifetime that can be utilized by the borrower (senior citizen) as per needs and not for speculative purposes.
4. Repayment of Reverse Mortgage Loan
The homeowner and now the borrower will not be required to repay the loan during his lifetime.
On his death or leaving the house permanently, the loan along with the accumulated interest is repaid through the sale of the property pledged.
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5. Home Value Falling Short
Any excess amount by the sale of the property is duly remitted to the borrower in case of permanent leaving of the house or his heirs in case of the death of the borrower.
6. Freeing the Property from Reverse Mortgage
In case customers get an additional income and accumulate an amount to repay his loan, he can free his property in midterm and can also apply for a re-reverse mortgage if required on the same property.
7. Eligibility Criteria
The applicant needs to have 100% equity in his property.
He should be more than a decided age point. If his wife is co-applicant, she should be also above criteria age.
How Does a Reverse Mortgage Work?
In a reverse mortgage, the client pledges a property that he already owns (with no existing loan outstanding against it). The bank, in turn, gives him a series of cashflow for a fixed tenure. These can be thought of as reverse EMIs.
The specific format national housing board (The facilitator for housing finance in India) is promoting is one in which, the tenure is 15 years and the oner of her house and his/her spouse continue to live in the house till their death – which can occur later than the tenure of the reverse mortgage.
Simply put, any senior citizen, opting for a reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, the can continue to live in the house.
Rate of Interest on the amount that the Bank Sanctions under Reverse Mortgage
Ther rate of interest on the reverse mortgage loan typically varies between 10% and 12%. However, the client will not be required to pay this interest.
Once he vacates the premises permanently, or in the event of his death, the lending institution will give the first option to the legal heirs of the property to settle the loan.
If they are unable to settle the loan, the lending institution will sell the property and, from its proceeds take his share principle like the total amount disbursed as loan and interest on it and give to the legal heirs.
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