5 Things to Know if You’re Interested in a Reverse Mortgage

 Old age couple

Photo courtesy: prakhar

What is a reverse mortgage?

A reverse mortgage, as the name suggests is opposite of normal housing loan (mortgage) and is available only to senior citizens.

How does it work?

Once you pledge your house for reverse mortgage, the bank after carrying out its due diligence will arrive at the value of the house. After creating the room for interest cost and price fluctuations, the bank will disburse the balance amount to you depending on the payment amount you choose.

With every payment that the bank gives you, your equity in the house decreases. This line of credit is open, typically for 15 years. Simply put, any senior citizen opting for reverse mortgage will get annuity (reverse EMI) from the bank for 15 years. Even after the tenure you can continue to stay in the house. Only if you leave the property permanently, or in case of death, the lending institution will seel the property, and from the proceeds it will take the amount that is payable by you to the bank; the balance will be distributed to your legal heirs.

What are the features of a reverse mortgage?

  • Any house owner over 60 years of age is eligible for a reverse mortgage. Married couples will be eligible as joint borrowers provided one of them is above 60 years of age and age of spouse is not below 55 years at the time of application.

  • Should be the owner of a residential property (house or flat) located in India in his/her own name.

  • The maximum loan is up to 60% of the value of the residential property. So, for example if you pledge a property worth Rs 50 lakh (INR 5 million), then the loan amount that you can get is Rs 30 lakh (INR 3 million).

  • The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).

  • The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

  • The revaluation of the property has to be undertaken by the bank or HFC once every 5 years. This is to ensure that the value of the house is more than the amount payable by you.

  • The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.

Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

What happens after the death of one or both of the spouses?

If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options — settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

Which are the financial institutions offering reverse mortgage?

Punjab National Bank, State Bank of India, Union Bank of India, LIC Housing Finance, Dewan Housing Finance, Canara Bank, Andhra Bank, Corporation Bank, Indian Bank, Central Bank of India.

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Author: Austin Comments: 2 comments Date: 30 Jan 2010
Categories: Loan Tags: , , ,

There are 2 comments. Leave a comment!

  • ¬ arizona insurance
    #5497 February 9th, 2010 at 8:42 am

    A reverse mortgage is not the worst decision a person retired will make. It at least gives a retiree access to money to live a better life in those older years. The cost of living keeps rising.

  • ¬ Austin
    #5502 February 9th, 2010 at 7:15 pm

    Thanks for your comments.

    Indeed — with the cost of living only keeps rising, a reverse mortgage gives a retiree an option to ensure that his basic needs are met.

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