A reverse mortgage is a financial product designed for homeowners, typically seniors, to convert a portion of their home equity into cash without selling the property. Unlike a traditional mortgage where the borrower makes monthly payments to the lender, a reverse mortgage allows homeowners to receive payments from the lender, essentially reversing the payment flow. Homeowners above 60 years of age can utilise the equity value of their residential property to avail funds via this loan facility.
The initial principal limit available to a borrower is decided based on the current market value of the property, borrower’s age, the interest rate charged and the lender’s margin.
For instance, a residential property valued at Rs. 1 crore is utilised for reverse mortgage funding, whereby,
- Lender’s margin is 20%.
- The loan tenor is 20 years.
The initial principal limit is calculated as a property’s market value less the lender’s margin. Here,
Initial principal limit = Rs. 1 crore – 20% of Rs. 1 crore = Rs. 80 lakh.
This amount includes the total payment made to the borrower along with all lender charges like interest, processing fees, etc. Borrowers can avail this financial assistance either as a lump sum or periodically, i.e., monthly, quarterly, half-yearly or yearly.
Unlike a mortgage advance, a reverse mortgage loan does not create an immediate liability on borrowers. Lenders thus initiate loan recovery only after the borrower permanently ceases to reside in the property or decides to sell it, or on his/her demise.
With this understanding of what a reverse mortgage is, check other essential details about the financing facility.
Reverse mortgage loan eligibility
An individual needs to fulfil the following eligibility requirements to avail a reverse mortgage loan against his/her residential property’s equity value.
- A borrower must be aged 60 years or above to avail this advance. When applying with the spouse, either one can be 60 years old, but the minimum age for spouse is 55 years.
- The house put for reverse mortgage should be owned by the applicant and carry a residual life of not less than 20 years.
- The property mortgaged must be self-occupied by the borrower and should also be his/her primary residence. Properties let out by a homeowner are not eligible for this loan facility.
- The property must also be free from any legal claims, liabilities or encumbrances.
Here, income and repayment capacity of a borrower does not bear any consequence as all eligibility requirements are based on the residential property.
Types of reverse mortgages
There are several types of reverse mortgagesv available in the market today, which cater to different needs and requirements.
- Home Equity Conversion Mortgage (HECM): This is the most popular and widely available reverse mortgage option. It is designed for senior citizens aged 62 years or older, and allows them to convert part of the equity in their home into cash.
- Proprietary reverse mortgage: This is a type of reverse mortgage offered by private lenders, and is designed for homeowners who have a high-value property but are ineligible for an HECM.
- Single-purpose reverse mortgage: This is a reverse mortgage that is available to homeowners who need funds for a specific purpose, such as home improvements or medical expenses. It is usually offered by non-profit organisations and government agencies.
How does reverse mortgage work
- Mortgage your residential property to avail a lump sum or periodic funding for an agreed number of years.
- Either or both spouses can continue to reside in the property for their lifetime.
- No repayments required during borrowers’ lifetime.
- The borrower can opt to reclaim property rights after repayment of the loan liability in full.
- Once the borrower and his/her spouse cease to reside permanently or in the case of their demise, the lender can proceed to auction the property for loan recovery.
- After the borrower and his/her spouse’s demise, a legal heir can opt to repay the loan for ownership rights to the property.
Documents required for reverse mortgage loan
Keep the following documents handy when applying for a reverse mortgage loan.
- Proof of identity, like Voter ID, PAN, Aadhaar, passport, employee ID card, etc.
- Proof of address such as Voter ID card, utility bills and passport.
- Proof of property ownership and residence, like title deed, property tax receipts, utility bills, etc.
- Passport size photographs.
The lender may ask you to provide additional document/s as and when required.
Reverse mortgage loan fees and charges
The fees and charges for the advance can vary from one lender to another. The common charges applicable include –
- Processing fees payable upfront.
- Statutory charges like stamp duty, mortgage registration fees, etc.
- Prepayment charges in case the borrower opts to switch lenders.
A reverse mortgage loan also involves timely payment of all premiums towards the home insurance policy.
Reverse mortgage loan interest rates
Interest rates on reverse mortgage advances also vary from one lender to another. These rates are usually marginally higher than rates applicable to mortgage advances like home loans.
A borrower can choose a suitable interest rate regime from the fixed and floating options based on the market trends.
Tax deductions on reverse mortgage
Tax-free earnings are one of the typical reverse mortgage benefits that retirees can enjoy. As per the Section 10(43) of the Income Tax Act 1961, the pay-outs received by a senior citizen, either as a lump sum or through periodic payments is not treated as an income. Hence, payments from the financing facility are non-taxable.
Important tips to avoid reverse mortgage scams
Take care to stay vigilant of any reverse mortgage scams with the following tips at hand –
- Avert from signing any document that you do not understand.
- Keep an eye for unsolicited advertisements and choose not to respond without confirming their authenticity.
- Avoid giving in to claims of house ownership with zero down payments.
- Consult a professional counsellor for any doubts or insights on the reverse mortgage loan.
When seeking funding, you can also look for alternative financing options like loans against property. These secured advances come with high-value funding and attractive features at competitive rates. Bajaj Finserv brings mortgage loan of up to Rs. 10.50 Crores for individuals with the right eligibility.
How to take a reverse mortgage loan?
A reverse mortgage loan is a unique credit option specially designed for senior citizens. A borrower does not need to make monthly payments after availing this loan. A person needs to mortgage his or her residential property to avail this loan.
The loan does not require a person to make repayments every month. Instead, it is only repaid after the borrower sells the property, moves out of it or passes away.
With a reverse mortgage loan in India, receive the loan amount in the form of a monthly payment, as a lump sum or line of credit and meet your financial requirements.
For a reverse mortgage, the finalisation of credit amount to be sanctioned is done based on the value of the house to be mortgaged. Keep the documents required for a reverse mortgage loan handy before you apply for one.
Alternatively, Bajaj Finserv offers Loans Against Property for individuals looking to avail funds against their residential properties. They can avail this loan at competitive Mortgage Loan interest rates and other charges. Repay the dues conveniently throughout a flexible repayment tenure.
Applicants can avail high loan amounts of up to Rs. 10.50 Crores against easy to meet Mortgage Loan eligibility criteria and documentation. Know other eligibility requirements that qualify you to apply for this loan.
A Bajaj Finserv Loan Against Property also offers hassle-free loan disbursal, balance transfer facility, high-value Top Up Loan, online account management and many more features.
Apply for this loan with a simple online application form and get instant approval and disbursal within 4 days of approval.
