Regular Mortgage
A regular mortgage loan or “mortgage” is used by borrowers to raise funds to buy a real estate property. The borrower’s property acts as the security for the loan. It allows the lender to take possession and sell the secured property and recover the loan amount if the borrower defaults on the loan, fails to abide by its terms or if the borrower is unable to payback the loan amount. The features of mortgage loan can vary considerably depending on its features such as the size and maturity of the loan, interest rate, method of repayment, among others. Mortgages are funded by both – Banks and Non Banking Financial Companies. The interest rate charged regularly at the time of repayment can either be “fixed” or “floating”. A fixed interest rate remains constant throughout the tenure of the loan while a floating interest rate may vary depending upon a change in Government policy concerning the home loan sector or due to other factors.
Reverse Mortgage
Reverse mortgage is the opposite of regular mortgage. It is designed for retired people (aged 60 and above) who are unable to support themselves financially but own a home. In a reverse mortgage, a senior citizen mortgages his property to a Bank and gets periodic payments to meet his monthly expenses. Unlike a home loan given to a borrower based on his home loan eligibility, in a reverse mortgage the borrower is not required to pay EMIs towards the principal and interest to the Bank. After the demise of the borrower the home loan is paid back by the legal heirs of the property failing which the Bank auctions the house to recover the dues.
The following are some of the conditions for reverse mortgage;
- When applied jointly with a spouse, at least one among the couple must be aged 60 or above
- Only residential properties can be mortgaged
- After the loan tenure (which may extend up to 20 years), the payments from the lender will stop. However the owners can continue to stay in the house until their demise
- Interest rate paid by the Bank is fixed i e. it will remain constant throughout the payment period
- There is no fixed condition towards the use of payments given by the lender.
In India, unlike housing loans, reverse mortgage is yet to gain a level of acceptance mainly because the tradition is to pass on the property to the next generation. People are not keen to use their property for their day-to-day needs.