Reverse Mortgages: How They Work and Who Can Benefit

Do you need additional funding for planned or unplanned expenses? Loans against your property make the funds easily accessible at attractive interest rates. Notably, two loan options sanction your loan based on your property’s value: Loan Against Property (LAP) and Reverse Mortgage. While a LAP provides a lump sum against your property’s value, a reverse mortgage offers monthly payments to help you sail through your financial obligations. However, it’s important to note that reverse mortgages are not yet a prevalent product in India. Here is how they work and who can benefit from them.

What is a Reverse Mortgage?

A reverse mortgage is a financial product that mortgages your property and provides you with a monthly payment up to a specific amount and period based on the pre-determined value and tenure. When you borrow a Loan Against Property, you must repay it to the lender with interest in EMIs. Conversely, with a reverse mortgage, the lender pays you monthly installments against your property’s market value. 

How Does Reverse Mortgage Work?

The working of reverse mortgages is entirely different from other loan types. Under this funding option, you receive regular monthly payments from the lender instead of paying EMIs to the lending institution. The interest amount gets added to the loan balance, so you don’t need to make any upfront payment. Once the loan term is over, you can repay the loan by selling the property or staying in the property until death, after which the lender sells the property.

Who Should Opt for Reverse Mortgage?

Reverse mortgage is a beneficial funding option for the following:

• Owners with Appreciating Property Values: If the value of your house is rapidly increasing or you anticipate a significant increase in its value in the next few years, a reverse mortgage makes great sense. When your property’s value rises, you can sell the property to repay the debt and still have a substantial chunk for yourself.
• Individuals with No Income Source: If you don’t have income stability, a reverse mortgage may provide a regular monthly income against the property’s value you own. 
• Senior Citizens: Senior citizens or retired people without pensions may find this funding option a regular source of income during their golden years. They may receive a monthly income for a long tenure, after which they can sell the property to repay the debt. Moreover, the owners can stay on the property until death and give the lender the right to sell it afterward. 

Benefits of Reverse Mortgage 

Some well-known benefits of reverse mortgage include the following:

• Reverse mortgages provide a regular income source to retired individuals and senior citizens without regular pensions but who own property.
• The payouts received are tax-free under an exemption under Section 10(43) of the Income Tax Act 1961. 
• After the borrower’s demise, their legal heirs can sell the property to repay the debt and keep the leftover amount.

Thoroughly weighing the benefits of various loan plans is essential before borrowing a reverse mortgage loan. Although it is a quick option to receive regular cash, it puts your property at risk. Therefore, research and compare the LAP rate and other terms and conditions before finalizing the loan deal.