Reverse Mortgage: Types, benefits & Loan Solution for Seniors

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25 MAY, 2021

In retirement, the absence of a regular income poses a significant concern, especially with the rising cost of living and healthcare expenses. The Central Government introduced the 'Reverse Mortgage' to address this challenge in the 2007-08 Union Budget.

This financial solution empowers senior citizens nationwide to maintain financial independence by mortgaging their property. Let’s delve into the details of the reverse mortgage scheme to understand how it provides a reliable source of income for day-to-day expenses during post-retirement life.

What is Reverse Mortgage?

Reverse Mortgage, a stark departure from traditional mortgage loans, offers a lifeline to senior citizens aged 60 and above. This unique concept allows them to mortgage their property to a bank, receiving regular payments in return. What sets it apart is its freedom – borrowers can stay in their homes for life without vacating.

The property's value, determined by demand, supply, and market conditions, influences the loan amount. As each payment is received, the borrower's equity in the house decreases.

Who Can Get a Reverse Mortgage Loan?

A reverse mortgage loan is a financial lifeline primarily designed for senior citizens who own a home, helping them supplement income during retirement. However, only some homeowners are eligible for this unique loan.

Here are the eligibility criteria:

Age Requirement: You must be at least 60 years old, and if applying jointly with your spouse, their age should be a minimum of 55 years, with no upper age limit for application.
Property Ownership: The property used as collateral must be self-owned and free of outstanding loans or dues.
Residency: The property should be your primary residence for at least the past year.

Financial institutions determine additional eligibility factors like property condition and maximum loan amount on a case-by-case basis. Meeting these criteria empowers senior citizens to explore the benefits of a reverse mortgage loan.

How Reverse Mortgage Works

Factors Influencing Property Value

The reverse mortgage loan amount depends on various factors like demand, supply, market conditions, and interest rates, collectively influencing the valuation of the property offered as collateral.

The Process of Mortgaging a Property

Seniors aged 60 and above can readily mortgage their self-owned property to a bank. This straightforward process allows them to secure a steady income stream, ensuring financial stability during retirement.

Regular Payments from the Bank

Post-mortgaging, the bank disburses a predetermined loan amount at regular intervals. This feature provides a consistent and reliable income source, supplementing the borrower's financial needs.

Decreasing Equity in the House

As each payment is received, the borrower's equity in the property gradually decreases. This gradual reduction aligns with the borrower's usage of the loan proceeds, ensuring a balanced financial approach.

Benefits of Reverse Mortgage

Financial liberty

A reverse mortgage helps senior citizens become financially independent, so they do not have to rely on their children for financial support. Moreover, the funds obtained through reverse mortgages can be used for any purpose per the borrower's needs.

Minimum eligibility criteria

Senior citizens who own a residential house and are above 60 years of age can easily avail of a reverse mortgage loan. The residential house must be in the borrower's name or jointly with their spouse.

Long tenure

Since reverse mortgage comes with a long tenure, senior citizens can ensure a steady flow of income to manage their routine expenses.

Property valuation

In the case of reverse mortgages, banks re-evaluate the property after every 5 years. Hence, if the property's value increases over time, borrowers can increase the loan value and avail a higher lump sum amount.

Tax benefits

Under the Income Tax Act 1961, the amount obtained through a reverse mortgage is eligible for tax deductions. However, a capital gain tax will be charged when alienating the mortgaged property to repay the loan.

Though a reverse mortgage loan has numerous benefits, most people hesitate to mortgage their property to a bank as they wish to transfer it to their children.

Other Types of Mortgages

Simple Mortgage
Imagine you want a loan, and you offer your property as security. If you fail to repay, the financial institution can sell the property to recover the loan amount.
Mortgage by Conditional Sale
Selling your property to someone with the condition that the sale becomes absolute if you don't repay the loan. It's like a sale with a safety net.
Usufructuary Mortgage
Suppose you lend money to a friend, and as security, your friend lets you live in their house until the loan is repaid. You enjoy the property's benefits during this period.
Mortgage by Title Deed
It is like a formal agreement. You sign a document (deed) stating your property is security for the loan. It's a clear and documented process.
English Mortgage
Temporarily giving away the title of your property to the financial institution. Once you repay the loan, the title returns to you.
Anomalous Mortgage
Suppose you use your car as security for a loan. It doesn't fit precisely into the standard types but serves a specific purpose, making it an anomalous mortgage.

Limitations of the Reverse Mortgage Loan

While reverse mortgage loans provide financial assistance, it's crucial to acknowledge their limitations.

Limitation on Lump Sum Payouts
If you plan to use the loan for significant one-time expenses, like home improvements, there's a restriction on the lump sum payout. The maximum allowed is 50% of the eligible loan amount, up to Rs 15 Lakh.
Expenses and Charges are Payable by the Borrower
Despite securing a reverse mortgage, property ownership remains yours. It entails responsibility for all property-related costs, covering maintenance, property taxes, stamp duty, and home insurance.
Prior Permission Required for Changes to Property
While retaining ownership, any property alterations, such as extensions or renovations, necessitate prior approval from the financial institution. It ensures adherence to agreed-upon terms and conditions.

Awareness of these limitations provides a realistic perspective on the practicalities of utilising reverse mortgage loans in India.

Reverse mortgages can help borrowers lead a financially stable life even post-retirement; hence, opting for it wouldn’t be a bad decision. Lastly, it is advisable to compare various aspects of different banks, such as interest rates, application processes, customer service, etc., before applying for a reverse mortgage. In case of any query, it is best to seek the help of a financial expert to help you make a well-informed decision.

Addressing Common Concerns

Many worry about the impact on inheritance. A reverse mortgage doesn't transfer ownership. Seniors retain possession, ensuring they can pass on the property to their heirs.

Emphasising the practical benefits of a reverse mortgage it ensures financial stability in retirement without compromising property ownership. This scheme caters to Indian seniors, offering a realistic solution to meet their financial needs while safeguarding their property for the next generation.

Frequently Asked Questions

1. Who is eligible for a reverse mortgage loan?

Seniors aged 60 or above, and in the case of joint applications, the spouse must be at least 55. There's no upper age limit, and self-owned property with no outstanding loans is a prerequisite.

2. What is the maximum period of a reverse mortgage loan?

The maximum loan period is generally 20 years, ensuring borrowers receive regular payments for an extended duration.

3. What is the interest rate for reverse mortgages?

Interest rates vary but are usually competitive, making reverse mortgages a financially viable option for seniors.

4. Which type of property is not eligible for reverse mortgage?

Properties with outstanding loans, commercial properties, and agricultural land are generally not eligible for reverse mortgages.

Reverse Mortgage: Types, Benefits And Loan Solution For Seniors