Reverse Mortgage-Loans

Old age brings own share of problems. As a person grows older, and his regular source of income dries up, his dependency on others can increase significantly if he has no retirement plans. With health care expenses on the rise and little social security, living the golden years respectfully can be quite a challenge for senior citizens. In such a scenario, a regular income stream that can help them meet their financial needs and maintain their current living standards becomes important.

But the benefit what senior citizens have is that their residential property is owned. And it is their main asset at that age.

To understand the concept of reverse mortgage, first let us understand what a regular mortgage is. In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (equated monthly installments), which comprise of both principal and interest amounts. The property is utilized as a security to cover the risk of default on the borrower’s part.

In the reverse mortgage, senior citizens, above the age of 60yrs (borrowers), who own a house property, but do not have regular income, can mortgage the same with the lender (a scheduled bank or a housing finance company – HFC). In return, the lender makes periodic payment to the borrowers during their lifetime. In spite of mortgaging the house property, the borrower can continue to stay in it during his entire life span and continue to receive regular flows of income from the lender as well. Also, since the borrower doesn’t have to service the loan, he need not bother about repaying the ‘borrowed amount’ to the lender.

India’s second largest private housing finance company, Dewan Housing Finance Corporation Limited (DHFL), is the first off the block In India with a reverse mortgage scheme called “Saksham”. The scheme is designed to supplement the monthly income of senior citizens. This scheme is offered to retired people above the age of 60 years who own property and have been living in it for at least one year.

Benefits of a reverse mortgage:

• Retain the ownership of your home for life. The remaining equity will be passed on to your heirs.
• Proceeds from reverse mortgages are tax-free. Proceeds could be used for: In-home care, Home repairs & improvements, paying off an existing mortgage, Education of grandchildren, Hospital & health care costs, paying off taxes and credit card debt, buying a second home, and Travel. Let your home pay you back!
• No loan repayment or payments as long as you live in your home.
• No income, medical or credit requirements

After taking a reverse mortgage there a few points to be considered:-

• They are slightly costlier than the regular home loan.
• Their interest rate is also higher.
• The interest is charged on the outstanding balance & is added to the amount you owe each month. Which means your total debts increases each month.

Hence the most important advantage offered by the reverse mortgage scheme is that despite mortgaging the house, the house owner retains its ownership, is entitled to live in the same throughout his lifetime and also has access to a regular income stream, which can help meet his day-to-day needs. From the bank’s/HFC’s perspective, the mortgage on the property in its favour ensures that there is no scope for default.