Putting your house on reverse mortgage would be typically the last resort for a person. And it is typically taken by people who are really cash-strapped or by those whose children are working in a different city or are not interested in the property for other reasons. But all this can change over a period of time—finances can improve due to a windfall gain or a high-paying job and children may get a transfer to the city of residence and may want to use the house. And if circumstances do take a turn, you can also make the reverse mortgage scheme take a U-turn and pay off the loan by exercising the prepayment option and buy back the house.
What is reverse mortgage?
A reverse mortgage is the exact opposite of a typical loan. While in a normal loan, you pay equated monthly instalments (EMIs) to the lender, in a reverse mortgage scheme, you pledge your property and the financial institution pays you an EMI against it.
The bank or a financial institution evaluates the property and pays up to 80-90% of the value in EMIs based on the tenor you choose. However, the loan amount is up to Rs 1 crore only even if the property value is higher.
Once the tenor expires, banks stop the EMIs but allows the borrower to stay in the house till their lifetime.
How does prepayment work?
Who can prepay? The loan can be prepaid either by the borrower himself or by his children. However, irrespective of who pays it off, the title of the property remains with the original borrower. Only on death of the borrower, the legal heirs can claim the title.
When can you prepay? The loan can be prepaid by the borrower either during the tenor or any time during their lifetime. The legal heirs can prepay only after the death of the borrower.
How much do you need to prepay? Suppose you have opted for a 20 years tenor but you want to prepay at the end of 10 years. So the amount you would need to prepay would be the sum of all EMIs paid by the bank to you until the end of 10 years plus the interest on the total outstanding amount. The interest varies from bank to bank.
Is there any cost? There is no prepayment penalty or processing fee.
What happens after borrower’s death?
After the borrower has passed away, the bank sells the house to recover the dues. The bank first asks the legal heirs to buy out the house. In case the legal heirs refuse to buy the house, then the bank sells it in the open market. If the bank is able to sell the house at a price higher than its total outstanding dues, it passes the excess funds realized to the legal heirs.