What is a Reverse Mortgage Loan: All You Need to Know

If you are a senior citizen (age of 60 years and above), you may have retired. In such a case, you must understand the notion of a reverse mortgage. After retirement, a person might need money for meeting emergencies, such as medical or regular expenses. Older people often face tremendous difficulties meeting their monthly expenses after retirement and usually depend on their families for support. However, some people may prefer to avoid relying on others for their sustenance. In such cases, reverse mortgages prove to be a helpful financial instrument. It can help those seniors who own properties to generate a monthly income after retirement. In the following paragraphs, we will see what a reverse mortgage is and how it works. 

What is a Reverse Mortgage Loan?

A reverse mortgage loan, like a standard mortgage, enables you to borrow money while using your self occupied  home as collateral. However, when you procure a reverse mortgage loan, the deed to your self occupied property remains in your name, similar to a standard mortgage. 

However, unlike a typical mortgage, you do not make monthly mortgage payments with a reverse mortgage loan. Instead, the bank or financial institution pays a regular amount to you. After your death, the bank may sell the property to recover the mortgage amount. Any excess from the sale goes to your family or legal heirs.

You must still pay property taxes and insurance if you have procured a reverse mortgage loan. Still, you may continue to utilise the property as your primary residence.

Features of a Reverse Mortgage Loan

• Immediate Financial Benefits: A reverse mortgage acts as a way to ensure financial independence after you have retired. It significantly improves the availability of fast and regularised finance.
• Usability Flexibility: A reverse mortgage loan gives you the freedom to spend the funds for whatever reason you need. 
• Minimal-To-No Default Risk: Unless you permanently leave the house, you retain its possession. Moreover, it only poses a risk of receiving payments once you stop paying taxes and insurance. 
• Repayment: No repayment is required as long as you live, you should pay all taxes relating to the house and maintain the property as your primary residence.
• Certain Conditions Must Be Satisfied: To obtain a reverse mortgage loan, you must meet some fundamental qualifications. It includes being at least 60 years old. The residual life of the property should be more than 20 years old. 

Tax Benefit Under Section 10(43) Of The Income Tax Act 1961

Thus, the perks of reverse mortgages for seniors are tax-free earnings. Whether lump sum or regular instalments, from FY 2008-09 reverse mortgages are not considered part of the total income. As a result, payments received from reverse mortgages are tax-free.

How Does a Reverse Mortgage Work?

With a reverse mortgage, the lender pays the homeowner directly, unlike a traditional mortgage, where the borrower pays EMIs against the loan. 

You get to choose how you receive the payments. The interest gets added to the loan total, so no upfront fees or payment is required. You retain ownership of the property. However, over the life of the loan, your debt grows. 

The proceeds from the sale of the property when you sell it or in case of your demise are sent to the lender to pay off the reverse mortgage’s principal, interest, insurance, and other expenses. Any excess amount goes to you (if still alive) or your nominee (in case of your death). If the legal heirs wish to retain the house, they must pay the mortgage to the lender.

Documentation Required to Obtain a Reverse Mortgage

You must submit the following documentation to obtain a reverse mortgage loan from an Indian bank:

• An identity proof, such as a voter ID card, PAN card, Aadhaar card or passport
• Address proof, such as utility bills, an Aadhaar card or a passport
• Evidence of ownership of the property, such as property tax receipts, utility bills and title deeds
• Bank account statement over the past six months
• Few copies of your passport-size photographs
• Income documentation includes IT returns for the previous two fiscal years, salary slips for the last three months (only for salaried individuals), TDS certificate. The bank may also request balance sheets and income statements for the previous three years (only for self-employed individuals)

How Much Can You Borrow With A Reverse Mortgage Loan? 

The bank will determine the maximum loan amount depending on the mortgaged property’s valuation. For example, most banks may offer 60-80% of the home’s worth under the reverse mortgage plan. Moreover, some banks also have minimum and maximum limits on the loan amount. Thus, if you own a house worth ₹50 lakh, the highest loan amount available to you is ₹40 lakh.

However, unlike a loan secured by real estate, the entire loan amount is not paid off at once. Instead, throughout the loan’s term, you will receive payments in monthly instalments upto ₹50,0000 per month. A reverse mortgage loan typically requires 15 years to repay its monthly instalments. However, some financial institutions provide loans of up to 20 years.

Who is Eligible for a Reverse Mortgage Loan?

Although the eligibility of a reverse mortgage might differ slightly with banks, the general eligibility criteria for obtaining one are as below: 

• Senior citizens who are residents of India and own a residential property
• In the case of a single borrower, the minimum age is 60 years. In the event of joint borrowers, the spouse’s age must be greater than 55 years.

Other Criteria

• The borrower must keep the house as their permanent primary  residence
• The borrower is responsible for paying property taxes and insurance regularly
• The house is well-kept to retain its worth
• There must be no liabilities on the residential property and the residential property should be free from any encumbrances.

Reverse Mortgage Scams

Homeowners should be aware of vendors and contractors who persuade senior citizens to take out a reverse mortgage loan to receive payments which might not be in their best interest. In addition, be cautious about whom you give power of attorney for the reverse mortgage, as the power can be misused.

Scammers may target seniors by convincing them to take out reverse mortgage loans designed for people with ownership of their houses. Therefore, you should be aware and extremely cautious of anyone who contacts you about obtaining a reverse mortgage or putting pressure on you to complete the transaction without due diligence.

How Can You Avoid Reverse Mortgage Scams?

If you feel like any of the points mentioned below are true in your case, there is a high chance that the reverse mortgage scheme offered to you is a trap:

• The company executive uses difficult-to-understand terminology and provides inadequate explanations.
• The offered deal seems “too good to be true”.
• The lender uses high-pressure sales techniques.
• You are receiving unwanted adverts, emails and phone calls.
• You are getting phone calls with pre-recorded messages.
• The company advises you not to contact your present lender or to consult with a real estate attorney or financial counsellor.
• The company wants to charge you for accessing reverse mortgage information.

It would help if you spoke with reputable professionals, such as your financial advisor or real estate attorney while opting for any such loans. Also, speak with trusted family members and ask for their assistance in understanding more about the loan and the lender you are dealing with. Finally, before signing anything, be sure you understand everything. Seek information about anything you cannot understand, and have a trusted confidant or an attorney review the documents before you sign them.

Conclusion

A reverse mortgage loan is an ideal way to support yourself even after retirement and not depend on your family for basic expenses. The loan amount would be dependent on the value of the collateral property. While it is a boon for senior citizens, it is important to evaluate the pros and cons of the loan carefully. 

With reverse mortgages offering the advantages of no immediate liability and the spouse receiving payments even after one partner passes away, there is also the disadvantage of having to pay when you vacate your property. Hence, ensure that your facts and knowledge of the scheme are verified and up-to-date with the necessary information.

Before availing a reverse mortgage loan, you should also ask yourself if it has a negative impact on your children after you pass away. Also, understand how long your family plans to stay in the collateral property. 

Frequently Asked Questions (FAQs)