As a result of the improved standard of living and recent medical advancements, the life expectancy in India has increased gradually over the years. However, the rising cost of medical treatments can take a toll on the finances of the individuals. Especially for senior citizens, who require regular medical check-ups and treatments, the increased medical expenses can be financially burdensome to a considerable extent.
Keeping this factor in mind, a concept known as “reverse mortgage” was introduced in India back in 2007. With the help of Reverse Mortgage, senior citizens can deal with their regular expenditures and live a financially independent life.
What is Reverse Mortgage?
Reverse Mortgage allows the senior citizens to mortgage their property to the bank or other financial institution and receive payments from them at regular intervals. Additionally, borrowers can continue to stay in their house till their death.
When the borrowers mortgage their property to a bank or other financial institutions, its value is derived on the basis of several fixed criteria such as demand and supply factors, and prices of immovable property among others. After the value of the property is determined, the bank or the financial institution lends the borrower a certain amount in the form of a loan at regular intervals. With the reception of each payment, the equity of the borrower in the house decreases.
Benefits of Reverse Mortgage
Prepayment of the loan amount
Borrowers can repay the loan amount to the loan provider at any time without having to worry about the prepayment charges.
Under the Income Tax Act, 1961, the loan amount received through a reverse mortgage is eligible for tax deductions. However, borrowers would be charged with a capital gains tax at the time of alienating the mortgaged property in order to repay the loan taken.
A reverse mortgage comes with long tenure. Therefore, senior citizens can ensure a steady flow of income to manage their routine expenses.
In the case of reverse mortgage, the financial institutions revalue the property after every 5 years. Hence, if the value of the property increases in due course, the borrowers can opt for increasing the loan value. As a result, they can avail an increased amount as a lump sum.
Settlement of the reverse mortgage takes place after the demise of borrowers and their spouses. Initially, the financial institution invites the family of the senior citizens to settle the loan along with the interest. Failing to which, the lender reserves the right to recover the loan amount by selling off the property.
A reverse mortgage is a wise choice for senior citizens as it provides them financial liberty. Since reverse mortgage requires heavy documentation, borrowers should read the terms and conditions carefully before signing the loan agreement. It is always recommended to settle for a financial institution that offers competitive interest rates. Individuals can also consider home loan balance transfer in order to avail the best deal for themselves.
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