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Retirement Planning - 6 - Reverse Mortgage

The most significant thing for people planning their retirement is to get a stable stream of cash to substitute the salary something that would cease to come post-retirement. For people not getting a Pension, this is an even bigger worry. For this you require to make a large upfront deposit to make the monthly income. What if you don’t have this huge amount of cash? Over your working life, you would have accumulated various assets – like house, gold, etc. One option is to sell some of these assets, and invest the amount thus obtained in the fixed income instruments. But if you sell these assets, you can no longer use them. For example, if you sell your house you would have to live in a rented house. This means that you don’t just have to live in a new place, but you also increase your monthly expense due to the rent. You would have to earn that much more interest every month in your retirement!
Is there any way you can utilize your assets while still owning and using them? Yes, that is reverse mortgage.

Reverse Mortage in India still at an infancy stage. The reverse mortgage came into life in the UK during the crash of 1929. Having evolved genetically from the developed countries and generally the USA, reverse mortgage is a plan formulated to benefit the senior citizens the most. Reverse mortgage Loan Products for senior citizens are the basic that every bank or financial institution follows.

Be very specific, Reverse mortgage is a Home Loan product planned for the senior citizens by converting their equity in any house belongings into an income channel without having to liquidate your equity in case of any requirement.

Things to know about Reverse mortgage

The Dealing Parties

Reverse mortgage loan involves two parties; • The borrower – A senior citizen • The lender - Any bank or housing finance institution

Security for the Lender

The borrower pledge their home property to a lender. Borrower of a Reverse Mortage doesn’t have to keep anything as a security with the Lender apart from the Home property.

Payment of the Loan to the Borrower

In return of the house property pledged the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower (senior citizen) as per needs and not for speculative purposes.

Repayment of Reverse Mortgage Loan

The homeowner/the borrower will not be compulsory to repay the loan throughout his lifetime. On his death or leaving the house permanently the loan along with the accumulated interest is repaid during the sale of the property pledged.

Home Value Falling Short

In case the accumulated interest and loan amount is bigger than the value of the mortgaged property, the mortgage loan is capped at the value of the home equity only and the lender is the party at loss.

Home Value in Excess

Any excess amount by the sale of the property is duly remitted to the borrower incase of permanent leaving of the house or his heirs in case of the death of the borrower.

How to Free the property from Reverse Mortgage?

In case you get an extra income and accumulate an amount to repay your loan, you can free your property in mid term and can also apply for re-reverse mortgage if required on the same property. In the usual mortgage loan the borrower begins with a large loan and lower equity in his house. In Reverse Mortage however, the borrower has a very high equity in his house and a non-recourse loan secluded by the home property. In the usual mortgage system as the normal mortgage payments are made the outstanding loan decreases and the house equity increases. Reverse is the case in Reverse Mortgage the loan amount increases with time and the home equity decreases with time. The Reverse Mortage pros and cons should be calculated carefully before subscribing to it. Since the bulk of the savings for the average Indian are typically locked away in a house or other property at the time of retirement and in case of requirement it cannot be encased except by selling the home or moving out. This is where reverse mortgage comes as an answer. Taking the common mortgage loans in lieu of your home as a security will not be feasible in the age above 50 as the repayment of the loan is not feasible. The Banks and Financial Institutions also won't be of any help in case of no income source. This is where the house property proves as an asset and brings in reverse mortgage that allows you to be the home owner as long as you live. Home ownership is an area most Indians are responsive about and reverse mortgage entitles you your house during your remaining life. According to demographic projections Reverse Mortage loan products could be a hit between the metros and also in areas like Kerala, Tamil Nadu, Goa and Chandigarh in India. With hardly any old age social security schemes and financial help lines, reverse mortgages have a potential market. Loans are available in the form of reverse mortgage without any income criteria at an age where standard loans are not available. Reverse mortgage for senior citizens is a social assurance post-retirement.

Reverse mortgage is a way of receiving the benefits of your home equity by retaining the home ownership and also without having to make any repayments. The senior citizens in India will definitely find reverse mortgage a solution for their financial requirements after retirement and help them in regaining their feeling of independence.

Benefits of a Reverse Mortgage

  • supplement your life and maintain your financial self-reliance
  • Allows you to continue to live in your home
  • You retain title (ownership) to your home, providing you continue to pay taxes and insurance
  • Make no monthly mortgage payments
  • There are no income, credit or health education
  • It is a non-recourse loan – you will have peace of mind knowing that the borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less, and no assets other than the home should be used to repay the debt. This apply only when the borrower or estate choose to sell the property to pay off the Reverse Mortage loan . If the borrower or estate want to retain the property the balance should be paid in full.
  • You will get money for all your needs such as insurance, health, home modifications, cash reserve, etc.
  • Enjoy the flexibility of determining how you wish to receive your cash disbursements
  • Repay the loan at any time without penalty.
  • Homeowner holds back the title even after availing the loan. The lender never takes control of the real property.
  • Your successors are not responsible to pay your loan back. Lender takes back his amount through the sale of the real property .Reverse Mortage is not expecting anything from your successors.
  • The aim of a reverse mortgage is to help the senior citizens by providing a financial support in their second innings. The borrower may remain in their house as long as they wish. Reverse mortgage claims the money only at the time the real estate property is sold.

Why Reverse Mortgage?

People are very eagerly planning to build a house at least before their retirement or immediately after their retirement so that they can enjoy retired life in their own house. But, as the real estate prices are in boom and house construction materials are becoming costly, it is very difficult to construct a house. Every one between the age group of 30 to 55 or 60 always dream of owing a house at least at their retired age, but it is very difficult as they will have to procure funds for their retirement also. In today’s scenario, no one wants to depend on their children at their retired age. Therefore, people think hundred times before constructing a house by using all their lifetime savings. If they do so, they will not be having any income to live. Now, there are two options before them. One is either to construct house from their savings, other is to go for a pension scheme. At this scenario he can avail benefits of only one option. But, both are very important as they are very much related to his financial as well as emotional status. Reverse Mortgage can be well defined as “a scheme under which a bank or financial institution permits the owner of a house to leverage the future value of the asset in to a steady source of income”. Reverse Mortage allows elderly people to have a steady stream of income by mortgaging self occupied property to banks or eligible financial institutions while continuing to live in and hold the title of the house till he is alive or sells the house or moves out. The Reverse Mortage is aptly named because the payment stream is ‘reversed’. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. In case of a regular mortgage, the borrower mortgages his existing property and uses the amount to finance the property or for any other purpose and is required to repay the loan amount in the form of Equated Monthly installments (EMI). The EMI would include the loan amount and the accumulated interest. The property mortgaged serves as a collateral security for the loan borrowed. In case of a regular mortgage the property is redeemed by repaying the loan amount within the permitted tenure during the lifetime, whereas in case of reverse mortgages the property finances a given tenure of life and is used to redeem the debt after the demise of the title holder.

In India, Reverse Mortgage is a new concept and hardly few people are aware of this. Recently, Union Finance Minister P Chidambaram in his Budget speech mooted the concept of reverse mortgage for people aged more than 60 years. This concept is new to India but quite popular in developed countries helping senior citizens to generate some cash flow. The most important thing in Reverse mortgage is that it gives the satisfaction of living in the own house, moreover it helps to procure funds for retired life.

How Reverse Mortgage Works?

In a standard mortgage or a home loan, you get an upfront loan and pay back in installments (EMIs). In a the bank gives you monthly installments (similar to the EMI for a home loan), for a fixed period of time (usually 15 years). Thus, instead of getting a lump-sum and paying it back, you get steady EMIs from the bank. This payment continues till the end of the reverse mortgage period. At the end of this period, you should ideally pay the bank a lump-sum amount that is agreed upon in the reverse mortgage contract, right? No and this is the best part you don’t have to worry about the final repayment of the large lump-sum amount. Here’s how it works.You need to guarantee your existing house (which should have no loan liability against it by the way) to the bank. After the death of the person taking the reverse mortgage, the bank can sell the house and get back its money. But the bank can’t sell the house till you and your spouse are alive and are living in the house. This means that you and your spouse can live in the house even after the reverse mortgage period is over. The bank can sell the house only after the death of the person taking the Reverse Mortage , and his / her spouse. You not only get a monthly cash flow for several years but also get to live in your own house till you are alive. Your partner can also stay in the house worry free. Only after the death of the person taking the reverse mortgage the bank can sell the house.

If the sale value of the house is more than the amount due to the bank the excess amount is given back to your legal heirs. If the sale value of the house is less than the amount due to the bank, the difference is borne by the bank – your legal heirs do not have to pay any shortfall. The bank bears this risk. If your legal heirs want to keep the house they can pay back the amounts allocated to the bank by you and get the house. So we can conclude that Reverse Mortgage is a very good Retirement Tool in all respect.

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