Reverse mortgage

The concept of a reverse mortgage loan (RML) dates back to 1961 US. Deering Savings & Loan employee Nelson Haynes conceived this unique form of financing to help Nellie Young, the widow of his former football coach in high school.

Reverse mortgage loan highlights – 

  • Minimum age to avail – 60 years.
  • Minimum age of a co-applicant – 55 years.
  • Maximum LTV – 60%.

It was in 1969 when Yung Ping Chen, a professor at UCLA presented the concept of RML in a Senate Committee on Aging congressional hearing.

Later in 1983, Senator John Heinz proposed RMLs be issued by the Federal Housing Administration (FHA) in a Senate congressional hearing. The next year, the Century Plan became the first RML to be issued by American Homestead.    

Reverse mortgage originated only in 2007. The demand for RMLs is considerably lower, owing to the lack of awareness. These loans are specifically aimed at senior citizens who can avail funding by mortgaging their house.

Few reasons to opt for an RML are –

  • Constant income generation  

Senior citizens with low or zero income can benefit the most from RMLs. Around 90% of individuals live on their savings after retiring with no pension. Additionally, having a health insurance plan in place is beneficial to cover the rising cost of healthcare, which increases with age.

Hence, RMLs can be advantageous for senior citizens, as these are sources of constant income. Borrowers can avail the funds either in a lump sum amount or as period payments like monthly, quarterly, or yearly.   

The ceiling for monthly payment is Rs. 50,000, which can stretch throughout the loan tenor. RML tenors are generally 10 years. However, some can extend up to 20 years. 

Opting for a reverse mortgage loan-enabled annuity (RMLeA) can be more beneficial if individuals seek payments throughout their lifetime. With RMLeA, the amount paid acts as a pension. A financial institution forwards the amount to an insurance company, which then disburses it in periodic frequencies to a borrower for his/her lifetime.

RMLs are similar to loans against property. Borrowers can use a loan against property for several purposes as a reverse mortgage scheme although in a much more comprehensive manner and for a lump sum of finances available.

  • No EMIs

Borrowers don’t have to repay the loan amount immediately, unlike traditional mortgage loans. Customers also don’t have to make any repayments when the loan tenor comes to an end. However, they can voluntarily choose to do so at no extra charges during the loan tenor.

The loan is only due when the last surviving borrower passes away. Here, the last surviving borrower denotes a customer’s spouse. He/she will be able to reside in the property after the primary borrower’s demise. 

  • No obligation for loan repayment 

One of the reverse mortgage benefits is that borrowers are not obligated to repay the loan at any time. The financial institution will seize the property and liquidate it to settle with the last surviving borrower’s demise. 

However, the homeowner’s legal heirs will be given an option to repay it before. The lender will only seize the house if they fail to do so.

Availing a loan against property can be more beneficial in such cases. Customers can repay the loan in easy steps and eliminate the chances of house seizure.     

RMLs are beneficial owing to the above reasons. However, there are some drawbacks to these loans.

Drawbacks of reverse mortgage loans

  • Low LTV

One of the drawbacks of RML is low LTV, unlike mortgage loans. The latter can provide LTV up to 75%.

  • Borrowers have to avail a home insurance

Homeowners need to have home insurance mandatorily. Not availing the same will render an RML due.

  • Homeowners cannot rent out the house 

A reverse mortgage loan will also become due if the homeowners rent out a portion or their entire house.

Hence, a loan against property can be advantageous as borrowers can rent their house even if they have mortgaged it. NBFCs like Bajaj Finserv provide these loans against minimal documentation and eligibility criteria.

They also provide pre-approved offers that limit the time to avail financing by making the process straightforward. Pre-approved offers come with home loans, business loans, personal loans, and a host of other financial products. Check your pre-approved offer by providing only your essential details.

Individuals must consider all the pros and cons of RML before availing. Children of the borrowers may not be keen on giving up their inheritance, which can be another drawback of this loan.