What is Reverse Mortgage?
Concept of reverse mortgage:-
The word ‘reverse’ in the term reverse mortgage explains the idea of this loan. A property (house) owned by a person is mortgaged to get a loan amount in lump sum or in installments over a period of time. The loan borrower will be using the property during the loan term while he is not bound to pay any amount for the loan. The property is pledged to lender by borrower and at the end of loan period lender can sell the property to recover loan amount. These loans are provided to senior citizens and it provides a person with financial support. This allows him/her to lead a life with financial independence at a period when they are not earning.
Reverse mortgage in India:-
Reverse mortgage was introduced to India in 2007-2008; changes in lifestyle and increase in number of nuclear families in Indian society has made reverse mortgage loans popular in the country. This proposal was passed in a budget that took place during this period. Any person, who is above of the age of 60 years and owns a house with no outstanding loan against the property he wishes to mortgage, is eligible to get a reverse mortgage loan. If there are two applicants then the co-applicant (usually the wife) will have to be at least 55 years of age.
Features of a reverse mortgage loan:-
Reverse mortgage loan in India has a basic nature of working and some of the basic essences of a mortgage loan are mentioned below.
The maximum loan amount on a house: This is the maximum amount that is got after reverse mortgaging a house. This can be up to 60-90% of the value of a house and sometimes this is restricted to certain amount (1 crore) as maximum including the interest rate.
Tenure: This is the period or term during which the borrower holds reverse mortgage loan. This period can vary between 10 and 15 years depending on the type of bank. If both or one of the applicants survive then after this period they can continue to live in the house but then no further loan will be provided. The reverse mortgaged property will be sold at higher value depending on the market after the death of applicants. The borrowers may also choose to leave the residence permanently. If this happens before the tenure term then the property will be sold to get back the borrowed loan amount. Excess amount earned on property sale will be handed to legal heir of the property.
Valuation of property: The property is valued before the loan is sanctioned and depending on the value the amount that has to be sanctioned will be decided. Revaluation in regular intervals of 3 years or 5 years and based on the revalued reports the amount will be revised. This happens based on the depreciation in value of property.
Interest rate: Interest rates on reverse mortgage loans in India vary from 12-15%. State Bank of India has a loan scheme that has a fixed interest rate of 12.75%.
Providers of reverse mortgage loans in India:-
- State bank of India
- Bank of Baroda
- Dewan housing finance limited
- Punjab national bank
Disadvantages of a reverse mortgage loan:
- Although reverse mortgage loan can act as a source of survival during old age it can always be called a last resort. It has few demerits which have to be noted before planning for a reverse mortgage loan.
- Pledge the property to loan lender means officially giving loan provider the right to sell the house to recover the loan. If the owner of a house is willing to transfer the ownership to someone after his/her death then this loan is not to be considered as a source of income.
- High rate of interest compared to other loans.
- Variation in interest rates and loan amount during the time of valuation can turn into serious problems at times.
The terms and conditions of the reverse mortgage loan are to be studied and taken care of before purchasing it. Everything from factors related to title of property, valuation of property, lending limits should be considered before choosing a particular mortgage loan.
Contributed By: B C Shetty & Co |
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Established in 1985 by Mr.Chandra Shekar Shetty, operating from 3 branches, B.C.Shetty & Co. is a firm dedicated to serving their clients with utmost transperancy by offering qualitative professional service. | |
2) Why the land on which the building stands is not considered for reverse mortgage even where the plot on which the building stands is worth in crores?