India boasts of a diverse population, wherein a significant number of individuals are below the age of 50 to 55 years. Plus, senior citizens account for almost 6% of the total population, according to a 2019 report. Studies also showed that by 2050, nearly 20% of India’s population would be over the age of 60. It thus also indicates an increasing need for financial assistance.
The Reverse mortgage loan was thus introduced in India as a means to provide financial support to senior citizens of the community. This scheme allows an individual to mortgage their house and convert its equity into cash. It is an ideal means to provide monetary assistance to asset-rich but cash-strapped retirees.
What is a reverse home mortgage?
Reverse mortgage is a financial product, wherein an individual mortgages their residential property to create a steady stream of income. Lenders disburse a portion of the market value of a mortgaged property to the borrower, which can then be used to pay for everyday expenses, as well as for emergency requirements.
There are several advantages of this type of mortgage scheme. Since these are tailor-made for senior citizens, these offer an affordable rate of interest and borrower-friendly terms that maximise the utilisation of the disbursed amount. Following are some of the reasons why one should consider a reverse home mortgage loan.
Immediate financial boost –
Loans on reverse mortgaging improve one’s financial standing as they do not have to repay the sum as monthly EMIs. The funding is disbursed in exchange for the property’s equity, and the borrower is not obligated to repay the utilised amount after the term ends.
These mortgage schemes can provide up to 60% to 90% of the current price of a particular mortgaged property as funds, which can amount to a substantial sum. Senior citizens can earn sizeable annuity by converting their property’s equity.
No end-use restrictions –
Funds disbursed against reverse mortgage do not come with any end-use restrictions, allowing a borrower to utilise the funds as per their need. It is a significant benefit over other forms of financial assistance, where the advance might come with restrictions to use.
Under this scheme, an individual can opt for monthly, quarterly, semi-annual, or annual pay-outs, where they can receive a maximum of Rs.50,000 every month. The loan also has provision for emergency lending; a borrower can avail up to 50% of the total disbursed amount or a total sum of Rs.15,00,000 (whichever is smaller) to cater to unforeseen incidents such as a medical emergency.
Right to residence –
Borrowers of a reverse mortgage loan retain the right to reside and use the mortgaged property for their lifetime. The guidelines, as introduced by the Reserve Bank of India, allow financial reimbursement by selling a mortgaged property only after the demise of a borrower and his or her partner.
Its benefits can also be availed as a joint policy, which further lessens the chances of untimely foreclosure.
Tax benefit –
Reverse mortgage schemes are categorised as welfare schemes rather than conventional loans extended by credit providers. This exempts a reverse mortgage loan from taxes under Section 10(43) of the Income Tax Act of 1961.
The loan comes with tax benefits similar to that of tax benefits offered on loan against property, which can help save a substantial sum during the repayment tenor.
These are some of the primary reasons why a senior citizen can consider reverse mortgage benefits to improve their financial standing. However, these financial products are only available for retirees.
Individuals who still have a regular source of income can opt for other financial products, like a loan against property. These advances offer substantial sums against a mortgaged property, and borrowers can pay off the debt over a flexible repayment tenor which can range from 2 to 20 years.
Both the Government of India and private organizations took several steps to provide improved financial independence to senior citizens. Reverse mortgage loans thus come off as a means to providing a source of financing that can help tackle any financial deficiency at any time.