What Is Reverse Mortgage Loan - What would you ideally need for retirement? A steady stream of income, a substantial corpus, and a sense of financial security. Imagine that you save continuously but invest mainly in real estate. When you retire, you will find that while you are still far away you can be strapped for cash. Today, young people want to own their own home and buying a home is easy with high disposable income and access to home loans. Therefore, rental income may not be as profitable or reliable as it used to be. Investing in property is more like capital and they reduce the asset allocation in their favor. While owning real estate provides a sense of financial well-being it does not offer liquidity. However, financial independence is essential to financial security. So a reverse mortgage can be the solution for someone who invests a lot in real estate?
Think of it as the opposite of a home loan. Under a reverse mortgage, you pledge your home to the bank, which in turn makes payments to you at regular intervals over a period of time. The advantage of a reverse mortgage is that you and your spouse own the home during your lifetime.
What Is Reverse Mortgage Loan
Depending on the payment structure you use, you can receive the flow for a fixed term (regular reverse mortgage loan - RML) or throughout your life (annuity activated reverse mortgage loan - RMLeA).
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Banks allow you to arrange your payments regularly or as a lump sum. You can take a regular reverse mortgage loan (RML) or one that has been converted into an annuity (RMLeA) and a combination of the two. It is important to understand the features of each option.
RML: RML offers payment for a fixed period. You will not receive any income if you survive the term of the loan. The maximum term offered by RML is 20 years but this can also be lower depending on the bank. The payments made by the bank are linked to the principal of the loan. The income you get from the bank under RML is now not taxable.
RMLeA: In RMLeA, the bank transfers the loan payment to the insurance company that buys the annuity on your behalf. You will continue to receive annuity payments (pension) until you die. The income you receive from the annuity is taxable.
To begin with, the loan given will not equal the value of the house. Banks provide loans based on the LTV (loan-to-value) rate, not the current market value of the property. LTV depends on several factors such as property location, borrower's credit history, bank policy, etc. LTV is usually 40 percent to 60 percent of the home's value.
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In addition, RML has a higher interest rate than home loans (currently 11 percent per annum) (8.3 percent - 8.7 percent). Since the title is never transferred to the bank, at the time of settlement, the tax liability will be on the legal heirs.
RML can be solved in two ways. Or your legal heirs foreclose on the house by making payments (principal and interest) to the bank. In this case, they will be entitled to only one year tax benefit on home loan repayment (currently the maximum deduction is Rs 1.5 lakh principal and Rs 2 lakh interest). Or, the bank can sell the property. Legal heirs will be entitled to any profits, but are responsible for paying capital gains on the sale. This applies to both RMLs and RMLeAs.
There are restrictions on what you can do with the total amount the bank pays you - for example you cannot invest in shares. Above this, you will have to pay a processing fee and there may be other related charges.
Reverse mortgages are expensive financial products. They significantly limit your investment options and are not tax efficient. They can also be complicated for your legal heirs.
How To Get Out Of A Reverse Mortgage
If you are desperate for financial independence, you can dispose of your real estate and downsize to a small apartment. Contrary to popular belief, renting makes more financial sense than buying real estate. The problem with annuities is that you don't have access to all of your capital. If you like the concept of a reverse mortgage, you can make an informal agreement directly with your child rather than using an intermediary such as a bank. Financially this may be the best solution for the family.
Samyuktha Vibhu is a Certified Financial Planner (CFP) at Financial Consulting LLP. She is interested in personal finance, enjoys bridge, and is studying to become a yoga teacher. India is now witnessing many changes not only in the economic conditions but also in the functioning of the society. Previously, parents in their families could rely on their children for their medical and other financial needs. But in today's world, young people are working in geography and many old people are living alone. They must take care of themselves. Life expectancy in India is increasing and at the same time the cost of medical treatment is also increasing drastically. In this scenario, it becomes really difficult for the elderly to manage their health and finances. Sometimes, their pension or other income is not enough to manage their monthly expenses. For the elderly, who do not have regular income or financial support from their children, this can lead to financial crisis.
Many of these seniors live in a home that may have great value but are unable to capitalize on the home's value. A reverse mortgage is a product that solves this problem. A reverse mortgage plan allows a senior citizen (above 60 years) to receive periodic payments from the bank while remaining the owner and occupying the home while remortgaging their home.
A reverse mortgage is the opposite of a regular home loan. In a reverse mortgage, an elderly person mortgages their property to a lender (bank), which then makes periodic payments to the borrower so that the borrower can meet his monthly payments. The borrower is not required to make regular monthly payments to the bank for principal and interest. During the term of the loan if one of the spouses dies, the other can continue to live in the house until the term of the loan is over. However, if borrowers continue to live beyond the loan term, they can stay in the home but will not receive monthly payments. At the time of the spouse's death, the bank gives the legal heirs two options - (1) settle the remaining loan and keep the house, or (2) the bank will sell the house, using the proceeds to settle it a. arrears. Transfer loan amount and balance amount to legal heirs.
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During the life of the loan, although the principal and accumulated interest go beyond the initial value of the loan amount, it is easily covered by the increase in the value of the house over time. Therefore, the outstanding loan amount is generally less than the current market value of the house. In case the bank sells the property after the borrower's death and the sale proceeds are less than the outstanding loan amount, the bank must bear the loss. This can happen if the bank's original estimate of the home's value is not in line with current real estate market rates.
According to NHB guidelines, the borrower is entitled to a loan of 75-90% of the value of the house, ie 75-90% loan to value ratio (LTV).
An activated reverse mortgage loan annuity product is an advanced reverse mortgage product. In a regular reverse mortgage product, the bank calculates and makes monthly payments directly to the borrower. While in RMLeA, the bank pays a lump sum to the life insurance company, which calculates the monthly payment, based on the real cost model, that it will pay for life. This monthly payment is called an annuity and is usually higher than the monthly payment you would receive from a regular reverse mortgage. The insurer can pay higher payouts because it invests a lump sum and earns an income on it. Because the bank pays the insurance company a lump sum, interest is charged before the total amount. Under a regular reverse mortgage, interest will only accrue on the payments. So if a borrower dies within a year, under RMLeA the bank will recover the entire loan amount whereas under a regular reverse mortgage, only the repayments will be recovered. You should understand both products well, before choosing one.
Currently, Star Union Dai Chi Life Insurance Company Limited, in association with Union Bank and Central Bank of India, is the only company offering RMLeA products. It offers two types of RMLeA products:
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In both cases, the loan amount can be increased if the value of the property increases significantly. According to NHB guidelines, the maximum loan-to-value (LTV) ratio for a 60-year-old borrower is 60%.
Rajat Sharma, 60, a retired government employee, owns the property
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