According to an estimation report by the United Nations Population Fund and HelpAge India, the number of elderly individuals in India is projected to touch the 173-million mark by 2026. Furthermore, a United Nations report indicates the possibility that India might witness an astronomical rise in the senior citizen demography by as much as 20% of the total population by 2050.
However, while this rise is evidence of the improving healthcare facilities and prevailing low mortality rate in old age, it is contrasted with the concern-worthy issue of rising costs of living. Hence, senior citizens must resort to a funding avenue that sufficiently supplements their pension or any other source of income to defray costs of living independently. On that note, a reverse mortgage might be an option worth the consideration.
What is a reverse mortgage loan?
It is a senior citizen-financing scheme that allows aged individuals to tap into the equity of their residential properties to secure funding. However, unlike a loan against property, a reverse mortgage allows individuals to mortgage their residential property to receive periodic payments from the lender for a specific tenor. The aggregate of such periodic payments is equal to the appraised value of a property minus the interest.
Borrowers can also opt for a lump sum amount under the reverse mortgage scheme, which must only be on account of specific expenditures as per the guidelines set by the National Housing Bank.
Who are eligible for a reverse mortgage loan?
Individuals need to satisfy the following criteria to enjoy the reverse mortgage benefits –
- The applicant must be an Indian citizen above 60 years of age.
- In the case of joint applicants – a married couple – one of them must be above 60 years of age while the other must be above the age of 55 years. Also, in the case of joint applicants, such property must be owned jointly as well.
- The property to be mortgaged must be a self-acquired, self-inhabited residence. Therefore, an individual cannot mortgage a residential property that he/she has inherited or received as a gift. Furthermore, they cannot mortgage a property that has been let out.
- The mortgaged property should possess a minimum of 20 years of residual life.
- The property to be mortgaged must be an applicant’s primary residence. It implies that an individual/s must spend the majority of their domestic time in such a property.
- The property to be mortgaged should not entail encumbrances like an existing loan against it.
What are the features of a reverse mortgage loan?
The features of a reverse mortgage loan are discussed below –
- Nature of loan payment
A borrower can choose to receive the loan amount in one or more lump-sum payments, periodic payments (monthly, quarterly, semi-annually, or annually), and/or a committed line of credit.
- Repayment of loan
One of the reverse mortgage benefits is that a borrower does not compulsorily need to repay the loan in their lifetime. After the applicant and his/her spouse pass away, the lender can sell such property to redeem the loan. However, borrowers or their heirs can choose to repay such loans to acquire back the property and prevent it from being sold off by the lender.
- End-usage restriction
One key point where a reverse mortgage loan is distinctive from a loan against property is the entailing of end-usage restriction. In the event an individual chooses to avail of a lump sum, it can only be on account of medical emergencies.
Other than that, such loan amounts can also be used for renovation and maintenance of a residential property, upgrading such property, etc. Therefore, alternatively, individuals can consider a loan against property to spend the loan amount as they see fit.
A loan against property can be used for multiple purposes due to the absence of any end-use restriction. For instance, if an individual has multiple debts, he/she can use such loan amounts to consolidate their debts. Debt consolidation helps an individual manage their finances better and is an exemplary financial strategy.
Furthermore, it is simpler to qualify for a loan against property compared to a reverse mortgage loan. An individual can qualify for a loan against property by meeting a few simple eligibility criteria.
Nevertheless, senior citizens must weigh their options as per their convenience. They should choose a funding avenue that suits their monetary needs best.