What is Reverse Mortgage

There is an old couple and they have a big house but no cash flow for their daily expenses and medical bills, now what should they do? So reverse mortgage is the solution for it.

What is a reverse mortgage?

A mortgage loan is a secured loan that you get by providing an asset to the lender. E.g.- house or commercial property. A reverse mortgage is a mortgage loan, commonly secured by a residential property that allows the borrower to access the property's burdenless value. A reverse mortgage, in its most basic form, allows you to take out a loan against the value of your home that you do not have to repay during your lifetime as long as you live in it and have not sold it. Here, the ownership of the house is transferred to the bank and the bank pays you instalments for the possession of the house.

What are the norms of the mortgage plan?

● When a single borrower, the minimum age is 60 years generally. It might differ from bank to bank.

● Loan term: Loans over a span of 10 years.

● Loan Amount: Rs. 3 lakhs minimum and Rs. 2 crores maximum.

What are the features?

● Interest rates are low.

● Low processing fee.

● There are no hidden fees

● There is no prepayment penalty.

Example-

There is an old couple who do not have children they have earned a lot but due to some situation they are falling short of cash flows. They are not able to meet their daily expenses and medical bills, so what they can do is as they have such a big house, they can transfer the ownership to the bank this is done in the way of a will, and earn annual or monthly instalments from the bank and meet their daily needs. If the value of the house is 2CR then according to the (LTV) loan-to-value ratio they would get 60% of the value of the house according to the norms in India for example for 10 years i.e., 1.2 CR.

For situation one, if one or both of them die within 5 years then the couple got only 60 lakhs. The bank has the authority to sell the house and then the gain that they get would be transferred to the legal heirs of the senior citizens. The bank recovers the principal amount as well as the interest amount from the legal heirs. They also have to pay the capital gain tax on the property as the property has been sold now.

For situation two, if both of them live for more than 10 years then the bank cannot just take ownership from the couple the bank has to wait till both of them die, and then only the bank can take up the ownership of the property and sell the property and earn the profits. The legal heirs also have the right to claim this house and then they can repay the entire loan amount and claim their right to this house.

Thank you.

Regards,

NIDHI PALRECHA ,

Kautilya,

IBS Mumbai.