Reverse Mortgage Loan (RML) is a financial product that is meant explicitly for seniors so that they can monetise their homes while retaining their ownership during their lifetime.
It is just the opposite of a home loan. In a home loan, the bank is the ‘actual’ owner of the home, and when you repay the home loan, you become the actual owner of the house. In the case of RML, the banks offer payment to elderly citizens. It can be either lumpsum or in regular intervals, such as monthly or quarterly.
Another important distinction between home loans and reverse mortgages is that in the case of home loans, the borrower repays the loan amount in regular instalments, and a reverse mortgage doesn’t require any immediate repayments. The loan amount, along with the accumulated interest, is recovered by the bank once the last surviving spouse passes away or shifts to a retirement home/relative’s house permanently.
Benefits of reverse mortgage
There are several benefits of reverse mortgages for senior citizens. Here are a few:
An additional source of income: Most senior citizens depend on interest income from their bank fixed deposits and post office savings. A few of them might get pensions as well. However, after retirement, as the expenses and healthcare costs increase, these income sources might fall short. In this aspect, elderly people can receive an additional source of income, which might help them to live in a dignified manner.
Retention of property ownership: During the loan tenure and beyond, the elderly couple can continue to live in their house without any fear of eviction. It is also applicable after the loan tenure is complete.
Don’t have to repay the loan: Here, senior citizens don’t have to repay the loan amount. The house is sold after the last surviving spouse passes away. The legal heir can get it back by paying the loan amount.
Tax benefits: The money that senior citizens receive is not considered income, and hence, it is not subjected to any income tax.
Illustration
Let us assume that you have a property that you wish to leverage as collateral for an RML from a bank. The bank will appoint a valuator to assess your property and ascertain its value. This value will determine the highest amount you can get from your property.
Typically, banks provide up to 60-80% of the home’s value under the reverse mortgage scheme. For instance, if the house’s value is Rs. 1 crore, you are eligible for a maximum loan of Rs. 80 lakhs.
Here, the entire amount is not disbursed in one go. For lumpsum payments, the amount is capped at ₹ 15 lakhs. Typically, you will receive the approved amount every month for 15 to 20 years.
Just like any other loan, a reverse mortgage loan also comes with an interest rate. However, the interest rate is not charged on the total amount but on the monthly payout.
Generally, the interest rate on RML is 2-3% higher than home loans.
So, if the interest rate is 10%, you will receive ₹19,302 as the monthly payment. So, at the end of 15 years, the bank has paid you ₹34,74,360. This difference between the loan amount and the actual amount paid by the bank is the interest amount, which stands at ₹45.25 lakhs, which is more than the monthly payout that you received from the bank.
Some important pointers
- The minimum age requirement to apply for RML is 60 years for the primary borrower and 55 years for the spouse in case of joint borrowing.
- Loan tenure is typically 10-15 years, and it depends on the age of borrowers.
- The loan is applicable for self-occupied house property in India without any existing loans.
- Loan to value will depend on the area. Generally, it is higher than 60%.
- The loan proceeds can be used for medical, family emergency expenditures, supplementing pension/other income and any other genuine reason. The loan is not available for speculative, trading and business purposes.
- The loan payout occurs periodically, such as monthly, quarterly, half-yearly and annual.
- The loan is not available for commercial properties.
- The property should be relatively young, as the residual life of the property should be at most 20 years.
- The RML is available for self-acquired and self-occupied residential property. It cannot be a gift or an inherited property.
Drawbacks of reverse mortgage
Reduced inheritance: As the loan amount with interest is recovered from the sale of the property after the borrower’s demise, the legal heir might not receive it as an inheritance.
Cost: The costs and fees associated with reverse mortgage loans can be higher than traditional loans.
Bear other expenses: As the borrower is still the owner, you have to pay property tax, home insurance and other expenses related to the upkeep of the house.
Prior permission for renovations: The borrower has to seek permission from the bank to carry out extensions or renovations.
Complexity: The terms and conditions of RML can be complex and hard to understand for some individuals. As a result, individuals might have to seek legal counsel before proceeding.
In conclusion, RML offers an additional source of income for senior citizens and helps them live a dignified life after retirement. Before considering RML, it is important to review the pros and cons in greater detail and seek expert opinions.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
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Updated: 31 Oct 2023, 01:03 PM IST