Pros And Cons Of Reverse Mortgage?
Reverse mortgage loan (RML) is considerably not popular in many countries, even though the Government announced it back in 2007. As the name suggests, it is a reverse secured loan provided only to senior citizens.
What Is A Reverse Mortgage Loan?
A Reverse mortgage loan is a type of loan against property where borrowers receive a timely amount by mortgaging their house. However, they don’t have to make EMI payments, unlike conventional loans.
The financial institution pays the loan amount either monthly, quarterly, annual, or as a lump sum amount. Borrowers can avail a maximum 60% of their current house value as a loan in reverse mortgage. Lenders may also conduct a property evaluation every 5 years.
The maximum tenor of the loan can range from 10 to 15 years; however, it can also go up to 20 years.
Repayment Of The Loan
Borrowers don’t have to repay the loan after the tenor ends. The loans become due only with the last surviving borrower’s death. However, the spouse can continue to stay in the house even after.
The lender will allow a borrower’s heir to settle his/her loan in case of death. It will liquidate the property in case that individual fails to repay the reverse mortgage.
Any surplus amount earned by a financial institution along with accrued expenses and interest goes to the legal heirs. It bears the loss if it fails to recover the entire cost of loan (principal + interest).
Foreclosure Of A Reverse mortgage loan
The lender can foreclose a Reverse mortgage loan when a borrower:
- Moves out of his/her house.
- Does not reside in his/her house for more than a year.
- Declares himself bankrupt.
- Fails to pay the insurance.
- Fails to pay the property tax.
- Abandons his/her property.
Foreclosure of a Reverse mortgage loan can also take place when a borrower goes against the terms and conditions of the lender. For example, if he/she creates an encumbrance on the house or rent it out.
Pros
1.Regular Income For Senior Citizens
A Reverse mortgage loan is an ideal option for senior citizens who don’t have a satisfactory income to meet their expenses.
This situation is particularly common with aged individuals whose only net worth is their property. The parents also don’t have any plans to move with their children.
A rising cost of medicines and healthcare costs can force the parents to look for external financing who don’t seek help from their children.
2. No Tax On The Loan
A reverse mortgage loan in India is not considered as income. Hence, borrowers don’t incur any income tax on the payments.
3. No Need To Give Up Home Ownership
Borrowers don’t give up home ownership when they take a Reverse mortgage loan. The transfer of home ownership only takes place when the loan is due.
4. No End-usage Restriction
The loan available can be used for any purpose. There is no end-usage restriction with a Reverse mortgage loan.
Cons
1.Insurance And Property Tax
A borrower has to pay insurance and property tax without fail. Failure to pay these charges will result in foreclosure of the loan.
2. Payment Of Capital Gains Tax
A borrower needs to pay capital gains tax in case of loan foreclosure due to reasons mentioned above.
3. Forfeiture Of House
Failure to repay the loan after the last surviving borrower’s death leads to property seizure by the lender. Heirs may show dissatisfaction in forfeiting their inheritance.
A loan against property is more beneficial. An aged individual can instead avail such a loan while they are employed and utilise the funds to meet their expenses. Borrowers can follow some easy ways to not default on the loan against property and retain their house. Aged customers additionally avail the lowest rates of interest. This is especially beneficial for the heirs who need to only complete pay the affordable EMIs and avoid forfeiting the property. Leading financial institutions like Bajaj Finserv Tenors offer loans that stretch up to 20 years and provide up to Rs. 3.5 Crore with their Loans Against Properties.
Must Read: How Reverse Mortgage a Boon for Senior Citizens?
Bajaj Finserv also provides pre-approved offers that save you time when availing loans by making the process less complicated. Pre-approved offers are available on secured loans like home loans, unsecured loans like business loans and personal loans, and numerous other financial products and services.
Are Reverse Mortgage Scam?
Considering both the pros and cons of a reverse mortgage scheme before applying is essential. Customers must also take a look at other financial products which suit their short-term or long-term financial requirements.
