What is Reverse Mortgage and How Does It Work?
Sanjay Das was a 67-year-old retired banker. He lived with his wife in their modest two-bedroom house in Kolkata. Their only daughter, Asha, lives in Australia. She does not wish to return to India. Earlier, the couple relied only on Sanjay’s pension, which was not enough. Finally, they opted for a reverse mortgage loan to supplement their monthly income. Asha was not interested in the property, so going for the reverse mortgage loan was an easy decision for them. They calculated the interest rate. Satisfied with it, they went ahead and opted for the reverse mortgage.
What is Reverse Mortgage?
Consider the reverse mortgage as the opposite of the traditional Home Loan. Here, a senior citizen mortgages a residential property. In exchange, there is a monthly, quarterly, annual or lump sum loan payment. He or she can borrow up to 60% of the value of the property. The mortgage continues until the death of the borrower or the spouse, whichever is later. The reverse mortgage scheme was launched in India in 2007.
What are the Benefits of Reverse Mortgage?
It has some great benefits. These are:
- Income Booster: A reverse mortgage scheme works very well for elderly couples. They need not rely on their children. It is not uncommon to find elderly couples living alone these days. Most of them are independent and prefer paying their own bills. An extra income throughout the retirement period can, thus, prove to be very handy.
- Corpus for a Medical Emergency: The chances of medical emergencies striking the elderly are higher. It helps to keep a corpus ready for such a time. The pay-outs from such a reverse mortgage can help build the corpus. They can undergo treatment without worrying about the finances.
- Re-evaluation Every Five Years: The maximum mortgage tenure is 15 years but some banks also increase to 20 years. The house is re-evaluated by the lender every five years. This ensures that if the valuation has increased, the borrowers can increase the quantum of the loan amount.
What are the Disadvantages of Reverse Mortgage?
Unfortunately, reverse mortgage has some disadvantages. These are:
- Lengthy Process: It needs lengthy application and documentation processes. This becomes difficult for senior citizens. This lengthy process often dissuades them from taking the reverse mortgage loan.
- Rigid Terms: The terms and conditions of reverse mortgage are a bit rigid. For instance, the regular payments made against reverse mortgage are fixed. You cannot customize these to meet your differing needs at different points of life. Everyone looks for flexibility. But this is something a reverse mortgage lacks.
- High Rate of Interest: The rate of interest in the reverse mortgage loan is on the higher side. So, if you intend to just pay for minor expenses like bills or such smaller things, you may want to consider other financing options with a lower interest rate.
Important Point to Know: When you reverse-mortgage your house, the bank holds the ownership documents. You continue to be the owner. However, the bank gets ownership of the house after the owner and his/her spouse passes away. This is an inherent trait of a reverse mortgage.
Can you Settle a Reverse Mortgage?
Yes. The lender usually settles the reverse mortgage after the death of the borrower or his/her spouse, whichever is later. Suppose your spouse passes away before you, you still continue to get the amount. Or vice versa. After you and your spouse, your children or relatives have the option to repay the entire borrowed money along with the interest to the lender. If they do this, the lender hands over the documents of the house to the kin. Else, the lender is free to sell off the property. It will first deduct the principal and the interest components. If there is any leftover sum, it hands the amount over to your legal heir. However, if there is a deficit, the lender bears the loss.
Also, you or your relatives can foreclose the reverse mortgage. They need to repay the loan amount for this.
The Bottom Line
So what is the verdict? Is a reverse mortgage a good option to go with? Broadly speaking, it is a good option for those who have retired from their jobs. It suits people who are free of responsibilities or have no next of kin. But, the interest rates associated with reverse mortgage are on the higher side. So, the borrower must be cautious about that. A reverse mortgage scheme is feasible if the terms and conditions are suitable.