Reverse Mortgage Loans - Explained
How do you know it’s time to retire? It’s when you stop lying about your age and start bragging about it!
Almost every person who has/is/will be planning to lead on the path of having a family and living a social life has plans of his/her/their retirement and wants to retire in peace. Retiring with no worries is almost everyone's life goal. Retirement Period is a long-term with almost no active income sources (there are passive income sources like dividend, royalty, interest incomes, etc.) and thus requires years of planning and investing with patience. Funding your retirement is no easy task and it generally requires a huge amount of retirement corpus for you to be living your retirement life without wondering, "Will this be sufficient or not?" And thus today, we are going to discuss how you can use your house as an Investment Product and can include it in your Retirement Corpus.
Home Sweet Home
Every Indian dreams of owning their dream house and we hustle all life to buy our own house one day with our own money. House is the most worthy and most precious asset (emotional asset) for us. We consider our house as our biggest asset even if it is still on home loans. For many of us, our house is still a liability for us and it will be a liability for years until it becomes an asset for us. Yet still, it will be a stagnant asset for us and it will still not provide us any more value than it has provided. In investing terms an Asset is an asset when it adds value to our balance sheet and adds money to our pocket. Assets that we use are assets in accounting terms but not in Investing terms. So in this blog, I am going to share with you some details about how you can convert your House as a Paying Investment which can be a part of your Retirement Corpus. Your House will be an extra Investment which will provide you some extra money (in the form of regular streams of income). Let us jump straightaway to the point on how you can do this.
Reverse Mortgage Loan
Think of Home Loans. You want to buy a house, you approach a bank, the bank checks your credibility (income, credit score, current loans, etc.), your loan gets approved, you get the loan amount, you pay regular payments for years (10-20). Now just reverse it. You have a house, you approach a bank, the bank checks your house's value, your loan gets approved, you get your regular streams of income or all money at one time, you don't pay your loan money back, you pay your house. Now one min. How? Reverse Mortgage Loans pays you money equivalent to your house value and pays you a regular stream of money and you don't pay the bank back in money but you pay your loan by giving your house. Now, why did I brought this up that it can be a part of your Retirement Corpus. Why just retirement corpus and why not Investment corpus as a whole?
No, Reverse Mortgage Loans are specifically meant for Retired persons above the age of 60. The loan period is of 10-15 years which is called the Repayment period which means the bank will pay you money Regularly for that period.
Still not clear how this works? Let us jump into more details.
Reverse Mortgage Loans - Source for your additional Income in Retirement.
Reverse Mortgage Loan is an Investment Product created to provide retired people above the age of 60 years an additional source to fund their Expenses. A retired couple or a Single retired person who has their own home (they must stay there) can take this product and can earn a regular stream of income. (monthly, quarterly, semi-annually, or annually) The Amount is derived from the house value of the person/s and the period until which the Payments will be made by the bank to the retired persons varies from 10-15 years depending on the age when they enter this product. Retired persons don't need to pay back anything in terms of money. The Repayment of the loan will be recovered from the sale of their house. If both of the retired people die before the Repayment period, the bank will sell the house and recover the amount of loan from the same. It is to be mentioned here that, the payment doesn't stop or the recovery of the house doesn't happen until both of the retired persons (person themselves and their spouse) die. If the retired persons don't want to sell their house or they want to repay the loan they can do it at any time without any extra prepayment charges. Okay, so what happens when the retired persons don't die and they survive the repayment period? Will the bank recover the charges by selling the house and take away their home?
This is where lies the beauty of the product. Let us see how and why.
First, this product is available to a person above the age of 60 and the max repayment period is 15 years. So, the payments will happen to the person max to max until they are 75 years old. In cases when the repayment period gets over and the person is still alive, the person doesn't need to vacate the house or make the payment back to the bank. They can stay there as long as both the persons (them and their spouse) are alive. The bank doesn't ask for repayment to the senior citizens till they choose to stay there and at least one of the couple is alive. The bank can only ask if they chose to move out of their house or both of the people die. The payments will stop after the repayment period (10-15 years) ends but they do not need to vacate their house. Now if the children of the retired parents who had availed this loan want to buy this ancestral home, they can do so by paying money equivalent to the house value at the time of loan approval. So suppose the house value was derived at 50 Lakh rupees and after 12 years both of the loan borrowers (retired couple) dies, their children can pay 50 Lakh rupees to the bank and can get their ancestral home back. Banks have to first get the consent of the legal heirs of the borrowers and only if the legal heirs deny buying the house, then and only then the bank can sell the house to a different buyer.
So this is what the Reverse Mortgage Loan is as an Investment Product. This blog is meant to explain to you the product. In the next blog, I will try to present you with a case study from which we can weigh out options whether this product is good or not. We will also have a look at how this loan value is calculated and what amount can you expect regularly and what are the other aspects of this. Post your questions regarding this product in the comment sections and I will mention and answer your questions in my next part of this article. Till then, Stay Safe. Stay Home. Stay Hydrated. Kyuki Aazooba kehte hai,
'Paani Peete Rehna Chahiye'
I have mentioned some of the questions which you can have regarding this product please read them and if you still have some more questions you can post them in the comments and I will surely answer them.
Some Common Questions Answered
I) Who will possess the ownership of the mortgaged property/house during the repayment period?
Ans:- The House's title deed will remain with the lender and the property will also be mortgaged to the lender. But unlike other loans, Reverse Mortgage Loans carry 'No Recourse Guarantee' which essentially means that the lender cannot ask the borrower to repay the loans or to vacate the house. The borrower has full rights to stay in the house until they die or voluntarily decide to vacate the house.
II) If the child wants to purchase the ancestral home after the death of their parents, then at what price they can do that?
Ans:- If during any time of the loan, or after the loan, the children/s of the parents of the retired parents want to purchase the house back, they can do so by paying the original sanctioned amount. (value of the house derived at the time of loan application)
III) Can a person who has taken this loan give a portion of the home for tenancy? (They will still stay there)
Ans:- No. The borrower cannot sub-let. Fully or Partially.
IV) Does the ups and downs in the price of the house have any effect on the amount that is being paid to the borrower - retired persons?
Ans:- No. The amount will stay fixed regardless of the house value being depreciated or appreciated due to market/external factors.
V) If one of the borrower - one of the retired couple dies, can the other continue to live in the house, or do he/she have to vacate the house?
Ans:- No he/she does not need to vacate the house. These loans are generally sanctioned to both of the persons. It means both of them are co-borrowers in the loans and thus until every borrower (two of them) dies or vacates the house, the lender cannot sell this house.
VI) How the monthly amount is decided?
Ans:- The amount is decided from the value of the house at the time of borrowing. We will have a case study on it in the next blog.
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