Saturday, February 12, 2011

Reverse Mortgage

In old age, let your home earn for you

Reverse mortgage allows you to cash in on one of your biggest assets -- house. So, if you need funds during retirement, pledge your property to a bank and you can secure periodic payments throughout your life.

Under this scheme, the bank assesses the value of the mortgage-free house and fixes a percentage of its current value based on parameters such as the likely lifespan of the senior citizen and his spouse. Typically the loan amount is 60-70% of the market value of the property. The applicants have the options of taking the loan principal as a lump sum at one go or as fixed monthly installments. After the death of the person concerned, the surviving spouse can continue to occupy the property till his/her demise while getting the same benefits.

From time to time, the value of the property is reassessed by the bank. If the valuation has increased, the borrowers are given the option of increasing the quantum of the loan. If they have opted for the monthly payment scheme, this amount is increased appropriately.

The principal and interest charges accrue in the bank while the applicants spend their lives in the home, or till they decide to sell the home, whichever is earlier. If the sale proceeds are lower than the accrued principal and interest amount, the bank takes the loss. This could happen if the real estate market has not moved up in the manner the bank has estimated.

The rate of interest charged varies from bank to bank, but current rate ranges between9.5% and 11.5%. The borrower also has to bear some charges, such as those related to processing, valuation and legal proceedings, for availing of the loan. Despite the charges, the product has evolved and become more customer-friendly over time. The new scheme that was launched in 2010 is much more refined than the one introduced in 2007. Now, the insurance companies has also come into the picture and are offering better returns to the borrower.

The new reverse mortgage loan-enabled annuity (RMLeA) scheme has lots of advantages compared with the earlier product, which was marred by limitations such as low payments and a cap of 20 years.Under the new scheme, the borrower is entitled to a higher loan based on the higher percentage assigned to the value of the property. Also, the principal amount of loan remains intact and is available for repayment to the bank on the demise of the borrower. So the borrower's heirs only have the liability of paying the interest accrual.

Still the concept has not taken off in India in a big way unlike in western countries., where the product is popular. Indian are sentimentally attached to their homes. Here, a parent would prefer to pass on his house to his children, unlike in the West, where a child would rather start living on his won before he turns 18.

This concept is primarily for senior citizens. Unless someone explains it lucidly to them, they are unlikely to understand it. Often, the children don't explain or simplify the concept because they fear that they may be adversely affected if the house is repossessed by the bank after the death of their parents.

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