Reverse mortgages are deemed excellent options for senior citizens who wish to convert their properties into sources of liquid income.
Reverse mortgage is a concept that has achieved greater traction in recent times. Post-retirement financial planning often falls short owing to lack of proper income on a monthly basis which helps in covering rising costs of living, recurring healthcare expenditure and other needs. A majority of senior citizens have property as their single biggest asset after retirement although this cannot usually be converted into an income stream owing to the non-liquid nature of real estate. This is where reverse mortgage plans come into the picture, having been introduced in the 2007-08 Union Budget by the Central Government.
What is reverse mortgage?
Reverse mortgage means the opposite way of functioning from regular home loans. In the latter system, people shell out EMIs every month to the lender for repaying the property buying loan. In the reverse mortgage system, senior citizens holding ownership of property or a house without sufficient regular income, can mortgage the same with the lender. The financial institution or lender will be paying a regular amount as a result to the owner of the property. After his/her demise, the financial institution will have the legal right to sell off the property while the extra amount will be remitted to the legal heirs of the person concerned.
Why should you consider reverse mortgage?
There are many reasons as to why you should at least consider the reverse mortgage system. These include the following:
- Reverse mortgage ensures complete peace of mind and social security for citizens after retirement.
- Senior citizens can lead independent lives with regular income instead of depending on their children for covering their daily expenses.
- The best part is that you do not have to shift out of the mortgaged property throughout your lifetime.
- This safeguards senior citizens from worries pertaining to paying for rental housing and fluctuations in the real estate market in terms of property prices.
- Senior citizens do not have to service these loans during their entire lifetime and there are no usage restrictions for the funds generated through reverse mortgage.
Things to keep in mind
Most senior citizens usually look to transfer their properties in the names of their children and they may be reluctant to mortgage the same to a lender. Origination costs are higher for reverse mortgages and these may be initially part of the loan balance and accrue interest for the customer. Another issue is that the real estate market is volatile sometimes and property valuations, loan amount and rate of interest may fluctuate as well.
Citizens can convert their major asset, i.e. property into a regular income source during their lifetime without moving out or giving up their ownership of the property. Those with settled children and those who are living alone, can consider this solution for earning extra income. A loan amount is disbursed by the financial institution as part of the reverse mortgage system and this is usually 60% of the value of the property. This is disbursed via periodic installments or in the form of a lump sum. The former are known as reverse EMIs and are paid out over a fixed duration, i.e. 10-15 years.
These payments are exempted from capital gains or income tax. The reverse mortgage loan becomes due if the owner wishes to sell the property or passes away. Upon the demise of the owner, his/her children and legal heirs may repay the loan and retrieve the property. They can also choose to let the lenders take possession of the property. Once it is sold, the additional proceeds over and above the loan will be transferred to their bank accounts.
Types of reverse mortgage, eligibility and other factors
Reverse mortgages usually come in two types, i.e. regular reverse mortgage loan (regular RML) and RMLeA or reverse mortgage loan enabled annuity. Banks mostly offer approximately 40-50% of the property’s market value in the residential category as reverse mortgage. Banks often claim that they charge modest processing charges of 0.5% or a maximum of 1% of the loan amount although you should watch out for hidden costs and additional expenses.
Without enabling the financial institution to sell off the house/property in question, legal heirs of the owner may also repay the pending loan amount and interest for releasing the mortgage. Pre-payment penalties may be incurred for paying off the loan in advance if and whenever possible. Eligibility criteria usually necessitates the home owner to prove that he/she is able to pay the insurance, property taxes and other maintenance expenses. If the taxes are not updated and insurance premiums not paid on time, it will lead to the loss/foreclosure of the property. Another thing to remember is that the loan amount that you obtain cannot be invested in either real estate or shares.
