There is a lot of debate and discussion over reverse mortgages now. Various committees have been formed to develop a basic framework or guidelines for the government to consider the proposal. What is RM and how does it work? Who is it meant for? In a normal mortgage, a homebuyer borrows money to finance his/her home. In a Reverse Mortgage (RM), the home property owner surrenders the title of the property to a lender and raises money. Isn't it the same as loan against property (LAP)? Not quite. In LAP, the borrower gets 60-70% of the money upfront. In RM, the lender doesn't pay the entire amount, but pays out a regular sum each month for the agreed time. The owner along with his/her spouse gets to stay in the property for the rest of their lives. Thus, the owner can ensure a regular cash flow in times of need and enjoy the benefit of using the property. Usually after the death of the owner, the spouse can continue using the property. In case both die during the period of the RM scheme, the lender will sell the property, take its share and distribute the rest among the heirs.The reverse mortgage is named thus because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
Usually, RMs are available to those above a specific age, say 60 years. The aim is to convert an immovable asset, like property into an income-generating one while continuing to use it. The amount of income is predetermined as is the contract period. If the property-owner outlives the agreement period, the monthly payments will stop. How is the income for property-owner determined? There are three crucial factors property value, the period of the payout and the rate. The property is evaluated by professionals employed by the lender, and revalued after a period of time and the fixed income amounts are changed accordingly.
In countries where the geriatric population is rising (such as Japan and Western Europe), RMs are popular. However, while it looks simple, lenders expose themselves to certain risks thanks to a variety of factors such as mortality, interest rates and real estate price changes. For the property owner signing away the roof over his head creates fears of loss of asset, eviction and inability to bequeath property. Besides, the legal,
taxation and other regulatory aspects are still not clear. This is why even in the US, the actual volume of RM is very small.
For the idea to be applicable in India, we need reliable data that should include mortality, home ownership levels among the elderly, trends in appreciation in home value and long-term movement of interest rates. Unfortunately, all this is hard to get. In India there is no universal social security kind of benefits. Only about 9% of the active working population is covered by formal schemes. This means that the potential target market for
RM would be quite large. On the other hand, the RM market can be applied only to cases where the title deed is clear and the marketability of the property is assured. Also, in India, a large number of elders are living with their family members. That again the limits the scope for RM.
Advantages of RM
It helps you maintain your financial independence and standard of living
Allows you to remain in your home and retain ownership till you or your spouse is alive.
Disadvantages of RM
The options can be confusing.
They may be costlier than LAP
Usually, RMs are available to those above a specific age, say 60 years. The aim is to convert an immovable asset, like property into an income-generating one while continuing to use it. The amount of income is predetermined as is the contract period. If the property-owner outlives the agreement period, the monthly payments will stop. How is the income for property-owner determined? There are three crucial factors property value, the period of the payout and the rate. The property is evaluated by professionals employed by the lender, and revalued after a period of time and the fixed income amounts are changed accordingly.
In countries where the geriatric population is rising (such as Japan and Western Europe), RMs are popular. However, while it looks simple, lenders expose themselves to certain risks thanks to a variety of factors such as mortality, interest rates and real estate price changes. For the property owner signing away the roof over his head creates fears of loss of asset, eviction and inability to bequeath property. Besides, the legal,
taxation and other regulatory aspects are still not clear. This is why even in the US, the actual volume of RM is very small.
For the idea to be applicable in India, we need reliable data that should include mortality, home ownership levels among the elderly, trends in appreciation in home value and long-term movement of interest rates. Unfortunately, all this is hard to get. In India there is no universal social security kind of benefits. Only about 9% of the active working population is covered by formal schemes. This means that the potential target market for
RM would be quite large. On the other hand, the RM market can be applied only to cases where the title deed is clear and the marketability of the property is assured. Also, in India, a large number of elders are living with their family members. That again the limits the scope for RM.
Advantages of RM
It helps you maintain your financial independence and standard of living
Allows you to remain in your home and retain ownership till you or your spouse is alive.
Disadvantages of RM
The options can be confusing.
They may be costlier than LAP
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