We understood the fundamentals on mortgage in one of earlier posts titled : "Understanding Mortgage" . I would suggest you to go through the details of Mortgage before getting in to understand about Reverse Mortgage.
In layman's definition, a mortgage is a loan to finance the purchase of one's home. This is clearly the biggest debt that you would ever get into in your life.
Literally, The word mortgage is a French Law
term meaning "death contract", meaning that the pledge ends (dies) when
either the obligation is fulfilled or the property is taken through foreclosure.
What is Reverse Mortgage Loan (RML) ?
Reverse mortgage
is a loan that enables home owners above 60 years of age to convert a
part of their self-owned home equity into income without having to sell
it.
Under the scheme, the bank determines the value of the property and fixes a percentage of its current value as loan amount. This is based on various parameters e.g. likely lifespan of the senior citizen and his spouse.
Under the scheme, the bank determines the value of the property and fixes a percentage of its current value as loan amount. This is based on various parameters e.g. likely lifespan of the senior citizen and his spouse.
Typically, the loan amount is 60-70% of the market
value of the property. The applicants have the option of taking the loan
as a lump sum or a fixed monthly amount. After the death of the senior
citizen, the surviving spouse can continue to occupy the property till
his/her demise. The value of the property is periodically re-evaluated
by both the parties, the owner and the bank. If the valuation has
increased, the applicants are given the option of increasing the quantum
of the loan.
However, one should be prepared to shell out
money for charges like processing, valuation, as well as legal fees for
availing of the loan. The maximum limit for processing charges is Rs 10,000. The valuation and
legal charges may add up to between Rs 5,000 and Rs 10,000 depending on
the loan amount.
How is the Reverse mortgage loan paid back?
With a reverse home mortgage, no payments are made during the life of
the borrower(s), unless you want to pre-pay and cancel the reverse mortgage contract.
The loan has to be paid only after both the borrower and spouse die. Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.
The loan has to be paid only after both the borrower and spouse die. Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.
When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains.
Renting out a Reverse Mortgaged property
One of the clauses in a reverse mortgage agreement is that the property
in question should be a house that is being used by the borrowers as
their principle residence. This implies that renting or leasing the
property is not legally possible.
Selling a Reverse Mortgaged Property
Selling a reverse mortgaged property is legally permitted. But one must consider the following before going ahead:
1) Compare the total debt incurred (because of the monthly principle and interest that the bank is accruing as per the reverse mortgage agreement) with that of the house's market value. If the amount owed to the bank is more or less the same as the current market value of the property, or if the positive difference is minimal, it may not make too much sense to sell the property.
2) In fact, you may not be able to sell the property if you owe an amount to the bank that is close to the value of the property and do not have the financial resources to cover the costs associated with selling the home.
What happens if property prices go down?
If the current value of the property is less than accrued principal and interest amount, the
bank suffers a loss. This is a risk that the bank is taking while signing a reverse mortgage agreement with you. This could happen if the real estate market has not moved up in the manner that the bank had initially estimated.
In that case, you are either required to pay back the principle + interest to the bank and take possession of your property or you may decide not to do so, in which case bank owns the property. Since the property price is less than principle+interest, bank might suffer a loss.
In that case, you are either required to pay back the principle + interest to the bank and take possession of your property or you may decide not to do so, in which case bank owns the property. Since the property price is less than principle+interest, bank might suffer a loss.
Tax Implication of selling a reverse mortgaged property
1) The borrower will
have to pay capital gains tax on the profit generated from the sale of
the property.
2) However, banks don't need to pay anything as the property
is held as a security or a collateral for the loan that it has provided.
3) Another
crucial consideration is that the loan borrower should have an
alternative accommodation before he plans to sell his house. A rule of
thumb is to opt for a sale only if the proceeds are large enough to
facilitate another accommodation after repaying the loan to the bank.
Besides, the transaction should yield enough amount so that it can be
invested to fetch reasonable monthly returns.
How to foreclose a RML?
1) A senior citizen who has reverse mortgaged his
property can easily claim ownership by paying the outstanding sum to the
bank.
2) The pay structure of a reverse mortgage
is such that you owe only what you have received of the loan amount
till date, along with the interest payable and any fees that the lender
may charge. According to bank officials, the institution calculates the
interest till the day the principal amount is to be paid. So the
interest is calculated on the money taken till date. Many public-sector
banks don't even have a foreclosure charge while some may have.
It should be used in exceptional cases like if one does not have any legal heirs or leaving money to/for them after death, is not a high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case.
When to consider taking Reverse Mortgage ?
Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses.
It should not be used to fund the shortfall in the retirement income. It should be used in exceptional cases like if one does not have any legal heirs or leaving money to/for them after death, is not a high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case.
Quick Recap on Reverse Mortgage Loan
1. Reverse Mortgage is available to Senior
Citizens only. Any house owner over 60 years of age is eligible for a
reverse mortgage. If wife is a co-applicant, she should be above 58.
2. The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
3. The maximum period of property mortgage
is 15 years. Minimum
tenure will be 10 years. Some banks like PNB offer a Reverse Mortgage Loan
for 20 years also.
4. The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his or her discretion.
5. The revaluation of the property has to be undertaken by the bank every 5 years.
6. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
7. Reverse mortgage rates will vary
according to market conditions depending on the wheather borrower has chosen Fixed or Floating interest rate.
8. One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.
Cheers
Manoj Arora
Mortgage loan modifications are a restructuring of the original agreement of a contract which has been agreed by both a lender and a borrower.
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Thank you for taking out time to read and comment on the article. Appreciated
ReplyDeleteFor the mortgage refinancing, loan recipient has to collect all documents and information about previous home loan. He must know about the previous loan that he has got from HDB or from some other bank like Citibank, Hong Leong Bank, DBS, HSBC, OCBC, Maybank, UOB, Standard Chartered, and so on. Each bank has different mortgage rates and policies; rules and regulations of one bank will not be the same for the other. So, it is advisable that the borrower should have the information about the rules and regulations of the current lender as well as the future one.
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Thanks for the update, Mathew
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ReplyDeleteReverse mortgage is a useful estate planning tool that banks and financial institutions ought to offer making available to seniors. It's a great security for them to ensure the delivery of their pensions in the amounts they thought forthcoming.
Reverse Mortgage Loan
A reverse mortgage is a great home loan program for seniors, but it's not for everyone. Some older homeowners may be better off with a traditional loan. Before tapping your home equity with a reverse mortgage, make sure you fully understand its pros and cons.
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