At old age along with health concerns another thing that impacts senior citizens a lot, is the lack of financial independence due to the unavailability of regular income. Where many rely on their children to take care of their daily requirements, others depend solely on pension. Many senior citizens do own a house in which they live but are unable to liquidate that asset. Reverse Mortgage Loan is the best solution for them. It is a great alternative to selling or moving out of the house in order to generate a fixed income stream.
What is Reverse Mortgage Loan?
A reverse mortgage loan is taken based on the value of the owned property by senior citizens. The lending financial institution provides either a lump sum or fixed monthly payments to the borrower. The best part is that, unlike mortgage loans, the borrower is not required to repay the loan amount in the form of EMIs. Instead, after the demise of the borrower, the lending institution has full rights to sell the mortgaged property to get the repayment of the loan.
Key Highlights of Reverse Mortgage Loan
- A reverse mortgage is the opposite of a home loan.
- A senior citizen pledges the rights of his owned house to the lending financial institution and in return gets a loan amount that does not require any repayment by him in the form of EMIs.
- Based on the demand for the mortgaged property, its market value, and the condition of the house, the lending institution sanctions a loan amount, usually around 60% of the property value.
- The disbursal can be in the form of a lump sum or periodic payments known as Reverse EMI.
- The Reverse EMI is paid to the borrower for a fixed period.
- The maximum payment period of Reverse EMI is 15 years and is mainly decided on the basis of the age of the applicant.
- If the borrower is alive even after the end of this fixed tenure, then he can continue living in his house till death but will not be entitled to receive the Reverse EMIs.
- The reverse mortgage loan becomes payable only after the death of the applicant or if he sells the property.
- On the death of the borrower, his children will be given an option to pay back the loan and retrieve the house or else the lender will sell the property to get the repayment of the loan.
- The borrower does not have to pay income tax or capital gain tax on the reverse EMIs.
What happens when the loan value becomes greater or lesser than the market value of the mortgaged home?
If the market value of the house drops or the borrower lives longer than expected, the loan amount may exceed the value of the home. In such cases, the borrower or borrower’s estate won’t be held responsible for paying the difference in the loan balance.
On the contrary, if the market value of the mortgaged property escalates, after deducting the loan balance the lending institution remits the surplus to the legal heirs of the borrower.
Benefits of taking a Reverse Mortgage Loan
- Financial Independence at Old Age.
- Ownership is retained by the borrower till his death. He can sell his property and foreclose the loan at any time.
- The borrower remains unaffected if the market value of the house dips.
- No income tax is levied on the Reverse EMIs.
- No monthly loan repayment like home loans.
- One can choose the most suitable mode of receiving the payment – lump sum, monthly EMIs, or line of credit.
The eligibility criteria to obtain Reverse Mortgage Loan are:
- To be above 60 years of age.
- The applicant must own a house with considerable home equity. Home equity is basically the current market value of the house minus any liens attached to it.
- The house must have been in existence for at least 20 years.
Documents Required for Reverse Mortgage Loan
- Proof of Identity: PAN/ Passport/ Driver’s License/ Voter ID card
- Proof of Residence/ Address: Recent copy of Telephone Bill/ Electricity Bill/Water Bill/ Piped Gas Bill or copy of Passport/ Driving License/ Aadhar Card
- Property Papers
- Last 6 months Bank Account Statements for all Bank Accounts held by the applicant
- 3 months payslip for salaried
- 2 yrs ITR, Computation of Income, P&L, Balance sheet with CA seal and sign for self-employed