How does a Reverse Mortgage work?

We all know about Home Loan, Rite!! The opposite of home loan is Reverse Mortgage. Under Reverse Mortgage all you need to do is place your fully owned house under lien with the loan provider such as banks or credit union, and receive monthly payment from them till the tenure of the loan. Reverse mortgage goes hand in hand with the owner and the spouse, if any one dies during the tenure of the loan the lender continues to provide monthly instalment, but if both dies, the lender gives option to owner’s legal heir to either settle the loan amount and regain the ownership or allow lender to sell the house and recover the amount. Any balance amount left over, after settling the loan amount passes over to the legal heir. The tenure of loan could be 10 to 20 years.

One point to know: If the tenure of the loan gets over, and the owner and spouse or any one of them stays alive, the lender will stop paying monthly instalments but will not force them to vacate the house till they or any one of them is alive.

Loan balance accumulation: After the completion of the loan tenure, the loan value keeps on increasing with the passage of time as the loan amount is settled only after the owner and the spouse dies. After, their death the house transfers to the legal heir or as per the will if any. And the new owner of the house is supposed to pay off the loan amount to regain the ownership or the lender would sell the same to settle the loan amount pass over the balance amount if any to the legal heir.

Now let’s understand it with an example:

Mr Rajesh is around 65 yrs old, and his wife is 64 yrs old, they live and own a house in Kolkata, West Bengal which is worth Rs 80 lacs now. They have two sons who are their legal heirs (50:50). The old aged Rajesh and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage. The Bank is ready to loan upto 50 lacs to them, which means they will be paid Rs 10k per month for next 15 yrs (just for understanding)

Now, they start getting monthly income of 10k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Rajesh dies at age 70. After this, his wife still continues to live in the house. Sadly she too, passes away at age 80. By this time the total loan outstanding becomes Rs 80 lacs (It was 50 lacs at the end of 15 yrs, but after that, it starts growing.)

Now the loan has to be paid off. The two sons do not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 1.0 crore. The bank sells the house and get total 1.0 crore, out of which 80 lacs is taken by the bank and rest is paid to legal heirs.

Few points to keep in mind

1. Sine Reverse loan works as joint loan, the house should in the name of both the parents and the age of any one should be above 60 years.
2. If the home is the name of any one, then his or her age should be above 60 years.
3. The home should not be vacated in continuance for more than a year at any point of time, if you do so, you will have to settle the Reverse mortgage.
4. Maximum loan amount is upto 60% of the house value
5. The borrower can opt for any mode of payment, like monthly, quarterly, biannually or annually.
6. The loan so taken does not attract any tax liability as it’s a loan and not an income.
7. Generally there is no prepayment penalty, and the loan amount can be paid at any time during the loan tenure.

Who offers Reverse Mortgage?

1. National Housing Bank (NHB)
2. LlC Housing Finance
3. Dewan Housing Finance Limited (DHFL)
4. State Bank of India (SBI)
5. Indian Bank
6. Central Bank of India
7. Andhra Bank
8. Corporation Bank
9. Canara Bank.
10. Punjab National Bank (PNB)

Happy Living!!!