News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 8 years ago
Rediff.com  » Business » Pitfalls in reverse mortgage that your heirs inherit

Pitfalls in reverse mortgage that your heirs inherit

August 18, 2015 17:53 IST
Get Rediff News in your Inbox:

The biggest catch in a reverse mortgage is that you cannot move out of the house

It is a common psychology of Indians to remain debt free post their retirement. Indian banks, too, do not want to take a risk by lending to retirees. However, demand has surged in India for a loan product called reverse mortgage.

The concept of unlocking the value of property and raising funds can be helpful for seniors who don’t have a regular income. However, what looks like a source of income to the senior citizen may prove to be a nightmare to the heirs if proper care is not taken.

How do reverse mortgages work

If a senior citizen owns a property and is in need of cash, he can reverse mortgage his property with a bank or financial institution and can obtain a loan. The property is valued by the bank and a certain proportion of the market value of the property is granted as a loan. The entire loan is not paid by the bank in one instalment. Instead, it is partly paid as a lump sum and partly paid in the form of annuities. The frequency of the annuity payments can be decided by the borrower (the senior citizen who avails the scheme).

Some pitfalls of reverse mortgage for seniors

Loan amount: The amount of loan you get in reverse mortgage is not the market value of your property. You will get only 60-70 per cent of the property value as loan. The actual amount differs from one lender to another. This is in fact lowers your chances for getting a desired amount, if planned for a long term, or if resorting to this for meeting some financial emergencies in lump sum.

Use of funds: There is a restriction on the use of funds you receive as loan. You can use it for personal purposes or for the house which you had mortgaged. However, you cannot invest this amount for your long term use, as per the loan terms.

The locked-in clause: The biggest catch in a reverse mortgage is that you cannot move out of the house. If you have decided that you want to stay in another place, then you will need to close the reverse mortgage loan before you move out. Many a time, senior citizens may be staying alone in their house and their children may be out of the country. They may want to stay with their children or move out of their house. But if there a reverse mortgage on the property, then this will not be possible.

Value of property over time: Another important condition for the success of a reverse mortgage scheme is that the value of the property in question should appreciate. The value of the property is assessed once every 5 years. If the bank finds that the value of the property has depreciated, then it may require the borrower to repay the loan partly or fully. If this is not feasible for the borrowers, banks can start taking action.

The impact of an unpaid reverse mortgage on the legal heirs

On the death of the borrower and his spouse, the heirs would be required to close the loan to save the property. If not, the bank has the right to sell the property and recover the loan, resulting in loss of inheritance. The excess proceeds are given to the legal heir.

The value of the property might have appreciated considerably from the time the loan was availed. Further, real estate is an asset which is usually on an upward trend. Real estate also carries an emotional and sentimental value for majority of Indians. Losing the possession of an ancestral house is therefore something that no one will prefer.

All this puts a huge pressure on legal heirs to retain the property by paying back the loan amount. Establishing inheritance and completing the process is also complicated once the borrower passes away. The experience may not be simple or pleasant for the legal heir.

Points to keep in mind while opting for reverse mortgage

  • Remember to keep your family members informed of the reverse mortgage, especially your legal heir.
  • Read the clauses carefully to understand all terms and conditions before signing.
  • The loan is partly disbursed as a lump sum and partly as annuity payments. Understand how much you need as a lump sum and opt for only this amount as the interest accumulates on the amount disbursed.
  • Remember that the outstanding amount of the loan increases over the loan tenure. So estimate the exact amount in order to avoid rude shocks.
  • Finally, try to use this as the last resort to raise funds, as it is both a costly and risky option, especially for your heirs.

Illustration: Uttam Ghosh/Rediff.com

Powered by

BankBazaar.com is a marketplace where you can compare and apply online for loans to meet all your personal loan, home loan, car loan and credit card needs from India's leading banks and NBFCs.
Copyright 2008 www.BankBazaar.com. All rights reserved.

Get Rediff News in your Inbox:
 

Moneywiz Live!