Things You Should Know About Reverse Mortgage Loans

Post-retirement life is meant to be stress-free. After long years of struggle and hard work, you must not have to worry about making ends meet or sourcing funds for your personal needs. You may have invested in fixed deposits, insurance schemes, or mutual funds, but would that be enough in the face of rising healthcare costs and inflation? If you have to think of an answer, then probably you should think of an alternative too. One of the options is reverse mortgage loans. It can help you sail through your post-retirement fund requirements with ease. Here’s everything you need to know.
 

What is a Reverse Mortgage Loan?

 
In contrast to mortgage loans, a reverse mortgage is a financing arrangement where the financial institution gives you regular monthly payments up to a specific period in return for mortgaging your property. Since you do not have any monthly repayment obligations, a reverse mortgage is appropriate for senior citizens who do not have a reliable source of income. Most financial institutions offer this loan with an LTV of up to 80% and a term of up to 15 years.

How Does a Reverse Mortgage Loan Work?

Compared to other loan forms, reverse mortgage loan works differently. Under this financing arrangement, instead of making EMI payments to the lending institution, the lender makes regular monthly payments to you—the borrower. The lender adds the applicable interest amount into the loan balance, so you do not have to worry about making an upfront payment. In a reverse mortgage loan, the interest component increases with each monthly payment made by the lending institution. On completion of the loan term, the lender ceases making monthly payments, and you have the option to repay the debt by selling your property or staying in the house until death, after which the lender sells the property.
 
Let’s use an example to understand it better:
 
Venkatesh Kumar, a private bank retiree and senior citizen, applies for a reverse mortgage loan with a financial institution called XYZ. On the successful submission of his loan application, the lender sends a valuator to determine his property's current market worth. The valuation officer assigns a value of Rs 1 crore to his property and grants him a reverse mortgage loan of Rs 80 lakh (80% LTV) for 15 years at a 10% reverse mortgage loan interest rate. Under the loan agreement, the lender provides Venkatesh with a monthly payment of Rs 19,305 for 180 months, with the lender rolling the interest into the loan balance with each payment. After 15 years, that is the conclusion of the loan term, Venkatesh sells his property for Rs 1.15 crore and pays the lender the principal amount plus accrued interest. Venkatesh utilises the remaining funds, money left after paying the lender, to buy a small house and lives happily for the rest of his life. 

 Also Read: Quick Guide to Mortgage Loans
 

Advantages of Reverse Mortgage Loans

Some of the well-known benefits of taking out a reverse mortgage loan in India are:
 

Secure Retirement

 Reverse mortgage loans are designed to help retirees and other senior citizens deal with financial challenges. Retirees who do not have liquidity in hand but have an immovable property (residential house) in their name can use this loan to cover their post-retirement expenses or to generate a regular income. 
 

No Tax Liability

Senior citizens use reverse mortgage loans as a replacement for their lost income.  However, the pay-out they receive on this loan is free from taxes. The payment that you receive under this financing arrangement is subject to an exemption under Section 10(43) of the Income Tax Act 1961. 
 

Legal Heirs Have Option

If your parents took a reverse mortgage loan, you, as the legal heir and new owner of the property have a few alternatives for paying off the debt.
 

• You have the option of selling the property and keeping the leftover proceeds after settling the outstanding debts.
   

• In case the loan dues exceed the property's worth, you have an option to settle the dues by giving the property title back to the lender.

 

• You may also use the reverse mortgage balance for refinancing purposes. 

 

Age in Your Home

To keep your wallet full after retirement, why sell your house to use the proceeds to meet your necessities? By opting for a reverse mortgage loan, you can choose to stay in your house while making regular cash out of it. 
 

Low Default Risks

In a reverse mortgage loan, the borrower is not burdened with monthly repayment obligations. The dues are recovered when the borrower dies, moves out of the mortgaged property or sells the property. Due to the non-availability of EMI, the chance of loan default is eliminated or minimised to a great extent.
 

Flexibility

Reverse mortgage loans in India offer great flexibility to the borrowers in terms of usage and repayment. You can use the payouts for any legitimate purpose:
 
Also Read: Sure Ways to Reduce the Burden of Your Mortgage Loan
 

Drawbacks of Reverse Mortgage Loan

Even though reverse mortgage loans have various advantages, you must consider the drawbacks of this loan form as well before going ahead with it.
 

Accumulating Interest Rate

In a reverse mortgage loan, you don't need to repay your debt in the form of EMI, where interest is deducted every month. This is, in some ways, the most significant disadvantage of this financing arrangement. With each monthly payment, the interest amount accumulates. Therefore, unlike other loan forms where interest is reduced over time, in a reverse mortgage scheme, the interest amount on your loan gradually grows as it approaches maturity.
 

Foreclosure is Risky

For retirees without a steady stream of income, foreclosing a reverse mortgage loan by paying a large sum of money is practically difficult. The only way they can do foreclosure is to sell their home and relocate somewhere else with the money left over after paying their debts.
 

It is Complicated

When it comes to reverse mortgage schemes, there are a lot of complex rules and conditions that are difficult for borrowers to comprehend. There are numerous risks associated with this form of lending. If you don't understand your loan terms as a borrower, not only you but your future generations will also suffer.
 

Occupancy Requirements

Numerous lenders will only offer a reverse mortgage scheme on a home where the owner is a resident. Lending institutions send representatives to the borrowers' residences to verify their residency. Therefore, if you own a home but reside elsewhere with your children, a reverse mortgage loan may not be an option for you.
 

Dispute Among Heirs

If you are planning to take a reverse mortgage loan on the family home, the legal heirs may express their concerns. You will find it difficult to obtain a No Objection Certificate (NOC) from other heirs. As such, a reverse mortgage loan in India on the family home is a tough task.
 
Also Read: Understanding The Post-Lockdown Mortgage Industry Before Buying A Home
 

Reverse Mortgage Loan Eligibility

 
Reverse mortgage schemes are specially designed for senior citizens. It implies that even if you are young, own a home, and want to stay in it for a long time, you will not be eligible for this loan.
 

Who Should Opt for a Reverse Mortgage Loan?

 

Property Appreciation

If you live in a home whose value is rapidly increasing or if you anticipate a significant increase in the value of your property soon as a result of upcoming government or MNC projects in your city, a reverse mortgage loan makes sense. This is because if the property's value increases, you will be left with a substantial chunk of money even after paying off your debt.
 

Life-long Stay

A reverse mortgage scheme is ideal for you if you intend to stay in your mortgaged property for a long time or the rest of your life. This is because you will have to pay several upfront expenses linked with your loan. In addition, you will be responsible for paying municipal taxes, house insurance, and other similar expenses.
 

Lack of Source of Income

Since staying employed with a regular source of income is difficult for senior citizens, a reverse mortgage scheme is the best alternative to continue receiving regular funds. Senior citizens who do not have any other source of income can opt for this financing option. 
 
Also Read: How to Use a Loan against Property EMI Calculator
 

To Conclude

Finally, thoroughly weighing the benefits and drawbacks is vital before deciding on a reverse mortgage loan in India. Even if it is the quickest option to receive regular monthly cash, taking out this loan could put your money or property at risk in the long run. Read the fine lines of your loan agreement and clear all your concerns in advance before signing the loan application.