How Does Reverse Mortgage Works?

By January 12, 2021 No Comments

India ranks 47 out of 56 countries assessed in terms of a year-over-year property price hike. Thus, prices remained stable in the last couple of years, making it the ideal time for homeowners to seek funding in the form of mortgage loans. Similarly, the reverse mortgage funding is also an attractive option for individuals requiring immediate finances.

Still, few individuals understand the workings of a reverse mortgage loan, which often leads to misconceptions and confusions about this financial product. Thus, if you are planning to avail such funding, assess the various aspects of such a mortgage financing option.

What is a reverse mortgage advance?

A reverse mortgage works in a contrary principle to that of a regular mortgage. In this form of loan, borrowers receive the proceeds as monthly instalments from their chosen lending institution. Thus, you do not need to service EMIs in this financing option. Instead, the reverse mortgaged property secures a regular monthly income for the owner.

One of the myths about this kind of loan against property is that lenders acquire ownership of the concerned property from the start of loan tenure. However, the function of a reverse mortgage scheme significantly differs.

A borrower can keep residing in a reverse mortgaged property until his/her demise. Lenders take full possession of this property only after this. At such a time, the borrower’s family members can choose to repay the existing reverse mortgage dues and recover the claimed property. Failing this, the HFC is free to auction this collateral and recover its dues.

Eligibility criteria for a reverse mortgage loan

Such loans are only available to individuals aged 60 years or more. Generally, only retired individuals can claim this particular type of financial assistance. Moreover, the mortgaged property must be at least 20 years old. 

Due to its unique nature, a borrower’s credit score, monthly income, existing dues are not considered in case of a reverse mortgage in India. Therefore, qualifying for these types of credit is easier.

Why should you consider reverse mortgage financing?

Reverse mortgage benefits can encourage property owners to consider it over other credit options –

  • No monthly instalment payments

A typical attraction of reverse mortgaging is that borrowers do not bear any financial liabilities for the loan during its tenure. This significantly reduces financial strain, especially considering that such borrowers are always retired individuals. 

  • Ability to reclaim the mortgaged property

A reverse mortgage comes with certain provisions, using which borrowers’ family members can reclaim this property. However, they would need to service the entire due within a specific period, failing which the lender is free to auction this property to recover the dues.

  • Regular income for borrowers

Retired individuals often face immense difficulties financially, especially those who do not have significant savings or a pension plan to rely on. For them, reverse mortgaging a property to raise credit can be highly beneficial. With a regular monthly source of income from this loan, these retired individuals can meet their financing needs conveniently.

  • Property ownership changes only after the borrower’s demise

Even if the mortgage loan tenure ends after 10 or 15 years, financial institutions do not evict the borrower from the mortgaged property allowing them to reside in it for as long as they live. Thus, you can spend the remainder of your days in your home when availing such an advance. The property’s possession thus passes on to the lender only after a borrower’s demise.

Still, borrowers should also know that a reverse mortgage financing suffers from certain drawbacks. For instance, individuals who opt for this form of finance cannot leave their house to their children as an inheritance unless opting to repay the advance. Additionally, raising credit via reverse mortgaging relies on heavily current property prices. Thus, any changes in the market rates can also affect the loan amount, interest rates, and other aspects of such a loan.

If one can afford the EMIs, a loan against property can be a useful alternative. These options provide a lump-sum principal to borrowers, alongside a significant tenure of up to 20 years for repayment. Repaying this credit as per the schedule enables borrowers to gain release from property mortgage. One can qualify for a LAP by meeting simple eligibility criteria.

Eligible candidates can also avail pre-approved offers on their home loans and loans against property, which expedite the application process. You can check your pre-approved offers by submitting some basic details. 

Reverse mortgage and loan against property are two distinct financial products. As each has separate sets of benefits, borrowers must consider all of those and match with their financial requirement before selecting, and apply accordingly.

Must Read: Common Problems MSMEs are Likely to Encounter While Seeking Loans