How a Reverse Mortgage Loan works?

A Reverse Mortgage Loan (RML) is the exact opposite of a Home Loan. Any senior citizen, who has a fully owned house can get a loan. The way, a Reverse Mortgage works is that the loan money eligible against the house will be divided into equated monthly installments (EMI’s) over many years and EMI amount will be given to the person every month.

This can easily act as Monthly income. At the end of the loan tenure, the bank stops paying the EMI or monthly income. If one of the spouses dies, the other can still continue to live in the house. After both die, the bank gives their heirs two options:-

1. Settle the overall outstanding loan and retain the house OR

2. Bank will sell the house and use the proceeds to settle the outstanding loan.

How the loan taken is paid back?

Under a reverse home mortgage, no repayments are made during the life time of the borrower. This means the loan has to be paid back only after both the borrower and spouse die.

After both the borrower and spouse passes away, the ownership of the home is  passed on to the estate or directed by a ‘Will’ to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the balance amount.

Features of Reverse Mortgage Loan

• Reverse Mortgage Loan is available only to Senior Citizens. Any house owner over 60 years of age is eligible for a reverse mortgage loan. If wife is a co-applicant, she should be above 58 years.
• The maximum loan given is up to 60% of the assessed value of the residential property subject to maximum of Rs 50 Lakhs.
• The maximum period of reverse property mortgage is for 15 years by a bank or a HFC (housing finance company). Some banks like Punjab National Bank offer Reverse Mortgage Loan for 20 years also.
• Many public sector banks offer Reverse Mortgage loans.
• The borrower can opt for monthly, quarterly or annual payments as per his discretion.
• The revaluation of the property has to be undertaken by the bank or HFC once in every 5 years.
• The amount received through reverse mortgage is considered as loan taken and not as income, hence the same will not attract any income tax liability.
• Reverse mortgage rates will vary based on whether the borrower has opted for Fixed or Floating interest rate.
• Processing fee for the loan would be between 0.5% and 1.5% of the loan amount.
• One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.

When to consider a Reverse Mortgage Loan?

In India, Reverse mortgage Loans are not very popular because of people’s emotional sentiments attached to their ‘Home’ and also because of a feeling that Reverse Mortgage is a loan taken before death. But RML should be seriously considered in following situations:

-An ideal situation to take a RML would be – if one does not have any legal heirs or when there is no need to leave behind an estate to heirs after death. 
-Another valid reason to take RML is by those old people who have assets of high worth, but who do not have a proper and steady stream of incomes. 

However Reverse Mortgage Loan should not be considered to fund one’s shortfall in retirement expenses.