Planning for your retirement is among the many financial goals you work towards during your earning years. Some get started early and invest towards their retirement fund right in their 20’s and 30’s, while others rely on their pension to help them coast through these years carefree. Whatever the strategy, it is always better to have other options you can rely on, should you need to. This is where the lesser-known reverse mortgage comes into play. Launched in 2007, it is a provision accessible only to seniors who are willing to leverage their home in order to generate a steady stream of income.
Unfortunately, the reverse mortgage loan hasn’t been overly popular in India. This may be due to the India tradition of passing on property to children or the next generation. As such, the idea of pledging property as a security may not be inherently appealing. However, the reverse mortgage scheme is actually quite beneficial and can work out favourably for all involved, including the legal heirs. To learn more about it, read on.
What is a reverse mortgage?
A reverse mortgage is the exact opposite of a regular mortgage. Here, instead of borrowing a lump sum and repaying the lender in EMI’s, the lender pays the borrower in installments. The amount the borrower receives is based on the market value of the property being pledged as collateral along with other key factors like the prevailing interest rate. The agreement with this provision is that the loan must be paid in full when the owner dies.
Here, the lender has the right to sell the property to cover the cost of the loan and any excess earnings are then passed on the legal heir. During the course of the tenure, the borrower is allowed to stay in the house and the spouse can continue to live in the house, even after the borrower has passed. The repayment does not begin during the lifetime of the borrower or their spouse.
Why should you consider the reverse mortgage scheme?
One of the main reasons why a reverse mortgage is a good option is that it provides senior citizens with financial stability. At the age of 60 and older, peace of mind is invaluable and the stress of not having enough money should be avoided at all costs.
Additionally, reverse mortgage promises repayment until the death of both, the borrower and their spouse, or until the tenure is completed. This way, you are guaranteed liquid cash all through and it can be used for any purpose.
Another good reason is the fact that it alleviates the burden of rental accommodation. It can be a common practice for seniors to sell their homes and live off the earnings in small rental premises. However, since rents fluctuate, this isn’t a wise option and a reverse mortgage addresses the problem easily.
What are the reverse mortgage benefits you can avail?
Besides the peace of mind and financial stability, here are the other benefits of a reverse mortgage scheme:
- The income earned through a reverse mortgage is tax-free
- Seniors can prepay the loan at no additional charge
- Home repair and renovation expenses can be claimed as a deduction in the computation of income
When it comes to the reverse mortgage, India has several notable lenders that offer the provision. This gives you the freedom to scout the market for the best offer or pick a lender you have past dealings with to take advantage of the relationship you share. All in all, the reverse mortgage has many benefits that seniors can enjoy, and it is only the lack of awareness that serves as a roadblock. Armed with this information, be sure to consider this provision as one of your options during retirement.
What should you be aware of before you opt for a reverse mortgage loan?
As it is a financial instrument, the most important thing to note are the charges that come along with it. Lenders will be upfront about the processing charges but may not include the other hidden charges that are applicable too. Further, you are required to prove that you can handle upkeep, insurance payments and pay the homeowner’s tax. Failure to keep up with these payments will result in a loss of property.
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