What is Reverse Mortgage and How Does it Work ?

While planning for Retirement one should keep in mind that what are the options available to an investor at the age of Retirement for the regular inflows or annuity. That might be Reverse Mortgage, Insurance Plans, SWP, etc.

Let’s check what is Reverse Mortgage? the options available, their advantages & disadvantages in this post.

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What is a reverse mortgage?

In a home loan scheme, you take a loan from the bank, buy a house with that loan and pay back the loan along with interest to the bank.

In the case of a reverse mortgage scheme, the homeowner receives money in installments equivalent to the value of the loan.

The bank will have the right to sell the property after the borrower passes away to recover the loan If the sale proceeds are in excess of the sum due to the bank, the excess is returned to the legal heirs. The borrower also has the option to repay the loan earlier as well.

A reverse mortgage allows a person to get a regular cash flow to take care of financial needs. The money can be received in a lump sum and/or regular payouts.

What are the options available for a person applying for a reverse mortgage?

There are two options available —Reverse Mortgage Loan(RML) and Reverse Mortgage Loan-enabled Annuity (RMLeA).

In the case of RML, you will either get a lump sum amount or amount in installments, depending on the frequency selected.

In the case of RMLeA, the loan amount is given to an insurance company. The insurance company works with the corpus such that it gives you an annuity for the rest of your life. This is like a pension.

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Who can choose to go for a reverse mortgage?

Senior citizens who own a house can opt to go for a reverse mortgage. The house should have been bought by the borrower. It should not be inherited property. Senior citizens may not have a regular flow of income and a reverse mortgage helps them to take care of living expenses.

How can I avail of a reverse mortgage?

The following conditions are required to be satisfied for a person to avail of a reverse mortgage –

• The person should be a senior citizen (age>60 years).
• The person should own a residential house.
• If the person is taking the loan jointly with the spouse, the spouse should be above 55 years old.
• The house can be owned individually by the person wanting the reverse mortgage or jointly with the spouse.
• You can apply for it through a bank or a financial institution. Fill in the application form and submit a copy of the PAN card and registered will, details of the property, and a list of legal heirs along with the form to the bank. The bank will assess the property and decide on the loan to be given. It usually gives loans up to 40%-60% of the value of the property. The bank will charge some fees related to the processing of the loan.
• SBI, LIC, PNB, Indian Bank, Andhra Bank, Dewan Housing Finance Limited are some of the organizations that offer a reverse mortgage.

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What are the tax implications of a reverse mortgage?

There are no tax implications in the case of a reverse mortgage. The amount received as a lump sum or as annuities is not liable to tax payments. If the property is sold before the reverse mortgage comes to an end, the relevant tax for capital gains is applicable.

What are the advantages and disadvantages of a reverse mortgage?

A reverse Mortgage looks like an attractive option. It is a good source of income for retirees. It uses the existing property to generate income.

The bank can recover the loan only after the death of the borrower or when the property is sold. There is no fixed tenure for the repayment of a loan.

Reverse Mortgages are not popular in India. Many people have a sentimental attachment to their property and do not want to sell it off for a regular income stream. They want to pass it on to their heirs.

The loan value given by banks for reverse mortgages is low. The owner has to ensure the upkeep of the property and pay all taxes and other dues related to the property. If this is not done, there can be foreclosure of loan or to prove that he/she can make their homeowner’s insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure of the loan.

The product is not easy to understand nor well publicized. People are unaware of its features and stay away from it.

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Should I go for a reverse mortgage?

A Reverse Mortgage is a great option for people who want to live in their house and at the same time earn an income but are not interested in giving the house to their heirs. It is good for people who have valuable property and not enough investments or savings to generate regular income for themselves.

But the documentation is a tedious process. There is not enough knowledge and information about a reverse mortgage in India. If as a retiree, you have a source of income but it falls a little short of what is needed, you can go for portfolio review or go for more tax-efficient investment products. The processing fees should be looked at and checked if it is not burning a hole in your pocket. If you have a big house, you might want to sell the property when the property market is good and you can invest the money in different investment products to get the most optimum returns. It may not be necessary that the bank fetches a good price for your property after your death. You can move into a smaller house where maintenance-related efforts and costs may be lower and will work to your advantage.

Consider these factors before you make the final decision on a reverse mortgage.

After retirement, one may not have a regular income channel. But expenses will continue to be there. Some expenses might increase and some might decrease.  It is important to have an appropriate strategy to get a regular income during retirement.  It is important to manage money smartly so that one does not have financial woes in the retirement years. If one invests an appropriate amount as per the financial plan in MFs when he/she has a regular income, a Reverse mortgage can be set up during the retirement years for regular income.

If you have any questions regarding what is Reverse Mortgage – feel free to ask in the comment section.