A constant flow of income after retirement is a luxury that only a few enjoy.
Investment in retirement benefits like PPF and others can help you be prepared for life after retirement, but they have certain limitations.
For senior citizens facing cash crushes, the reverse mortgage scheme could be a good option to manage constant cash flow. The government introduced the scheme to provide a supplement income scheme to people over 60.
Under the reverse mortgage scheme, senior citizens can receive periodic monthly payments against any owned residential property.
They can mortgage the property as collateral with a bank or a financial institution and get a loan against it. The maximum monthly payment under the scheme is capped at Rs 50,000 in a year.
To be eligible to take a loan under the reverse mortgage scheme offered by the banks, the applicant must be over 60.
The loan can only be against the mortgage of a fully owned and self-acquired home which is not inherited or gifted.
The property mortgaged should be at least 20 years old. The scheme is not available to senior citizens living in rented accommodation.
How does Reverse Mortgage Work?
The bank will finalise your loan quantum eligibility based on the house’s condition. Usually, the loan-to-value ratio under this scheme is 60-80 per cent.
This means the property is worth Rs 1 crore; the loan amount can be between Rs 60-80 lakh. The maximum loan amount most banks offer is Rs 1 crore, even when the property’s worth is more.
The maximum loan period offered is 10-20 years across major banks.
The bank then disburses a loan amount to the borrower through periodic payments after considering a margin for interest costs and price fluctuations.
The periodic payments, also known as reverse EMI, are received by the borrower over the fixed loan tenure. With each monthly or quarterly payment, the equity or the individual’s interest in the house decreases.
The loan amount under the scheme gets due after the last survivor dies. The heir of the borrowers is given the option of settling the loan by paying the due amount along with accumulated interest.
However, if the nominee cannot repay the loan, the bank recovers the amount by sale proceeds of the property.
The extra amount after selling the property and settling the loan is paid to the legal heir of the borrower. If the sale proceeds are lower than the accrued principal plus interest amount, the bank bears the loss.