A reverse mortgage loan, as the name specifies, is the opposite of a mortgage loan where you borrow money from a bank to buy a home and pay equated monthly instalment (EMI). In a reverse mortgage loan, the individual’s property is mortgaged to the bank and the bank pays a regular income to the individual. The individual continues to reside in his or her home till the death but the tenure of regular payment against the property can be from 10 years to 20 years depending upon the bank’s policy.
Hence reverse mortgage does act as financial support for senior citizens if they do not have any other source of income or if the income from other sources is not sufficient to meet their post-retirement expenses.
How Does It Work?
The bank determines the value of the property mortgaged by an individual. The value is arrived at by considering various parameters such as the demand-supply situation, condition of the property, location etc. Once the value is determined, the bank disburses the loan to the individual, paid at regular intervals. It can be monthly, quarterly, or yearly. The individual can opt for a lump sum amount too.
The individual receives a regular payment till the loan tenure is in force. Most banks offer a tenure of 10 years to 15 years. Users can check with individual banks on interest rates as well as the tenure of reverse mortgage loans.
Important Points To Keep In Mind
Loan to value in case of reverse mortgage goes up to 90% of the value of the property. Banks offer fixed rates as well as the floating rate of interest payment. It is an individual’s choice to opt for whatever suits him or her the most. In an increasing rate regime, a fixed rate is good but in a decreasing rate regime, a floating rate is preferable.
If the tenure expires, the individual can stay in the same house. The payment will no more be done by the bank to the individual. However, there will be no forceful exit of the individual from the mortgaged property. The settlement can be done after an individual’s death.
If the individual dies, the bank gives the option to the kin of the individual to repay the amount and reclaim the property. Else, the bank will recover the amount by disposing off the property.
Finally, the reverse mortgage loan process is more complex than a regular loan process. Be ready with all required documents and certificates for faster processing. Professional guidance can always help in determining if a reverse mortgage is the right choice and exploring alternative options that may better align with their financial goals.
The author is an Independent Financial Journalist