Should you consider reverse mortgage while planning for retirement?
Reverse mortgage was introduced in India in 2007 and was targeted towards senior citizens who have assets but have poor cashflow. However, this overtime has proven to be one of the most unpopular products and the reason for the same includes emotional attachment towards their property. There is also a lack of understanding about the product and no awareness is being created regarding reverse mortgage products.
What is reverse mortgage?
Reverse mortgage is something opposite to that of our normal mortgage or loan that we take. Typically, in case of a normal mortgage or a home loan, you pay to the bank for the house over the defined loan tenure. Reverse mortgage is primarily designed for people who are not able to support themselves in retirement but have assets such as their home.
How is it works?
In reverse mortgage, you as a borrower mortgage the home to the bank for which you would receive monthly payouts from the bank for the predetermined mortgage duration. If in that duration the borrower dies then his/her spouse would get the monthly payout for the tenure left (only if jointly borrowed) and in case within the tenure if the spouse also dies then the legal heirs have to make the loan payment to the bank to free the asset (home). If that doesn’t happen then banks carry out auctions to sell the house and recover the amount.
What is the eligibility?
- Borrower must be an Indian resident
- In case of a single borrower minimum age must be 60 years and in case of joint borrowers, spouse’s age should be more than 58 years
- Loan tenure is usually 10 to 15 years, depending upon the age of borrowers
- If your age is between 60 to 70 years then 45 per cent, 71 to 75 years 50 per cent, 76 to 80 years 55 per cent and above 80 years 60 per cent of the value of the property would be considered as the loan amount
- Loan amount is minimum Rs. 3 lakhs with a ceiling of Rs. 1 crore
What are the fees and interest rates?
- Interest rate for above Rs. 3 lakhs and up to Rs. 1 crore is 1-year MCLR + 2 per cent, effective rate comes to around 10.5 per cent p.a.
- Processing fee is 0.5 per cent of the loan amount with minimum of Rs. 2,000 and maximum of Rs. 20,000 plus applicable taxes
- Post loan sanction stamp duty is payable for loan agreement and mortgage, property insurance premium is also payable. Even CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest) registration fee of Rs 50 + GST up to Rs 5 lakh limit and Rs 100 + GST for limits above Rs 5 lakh is payable.
Should opt for a reverse mortgage?
Reverse mortgage is something which must be opted only in the times of emergency wherein you are not able to fulfil even your basic requirements. This is because if you survive the tenure then you need to repay the loan to the bank to get the home back which in that situation may not be possible unless you have any other source of income which is good enough to pay back the loan amount or either your legal heirs must be in a position to pay it back. A reverse mortgage is something like loan against property, wherein you keep the property as a guarantee to get the loan. So, it is recommended to opt for the same only in case of emergency.
Planning early for the retirement usually helps you avoid these last-minute fixes which is not as effective as early planning. So, it is highly recommended to start retirement planning as early as possible. What is the ideal time for planning your retirement? As soon as you get your first job.