New Delhi: Having a good credit rating is essential for obtaining a loan from banks. Although some non-bank financial companies (NBFCs) offer loans to people with low credit scores, they charge much higher interest rates to these borrowers. But you can still get a loan from banks even if you don’t have a good credit rating as long as you own property. You can take out a reverse mortgage on your property. Here the bank will pay you a fixed monthly payment for your monthly expenses and you will have to repay the total outstanding loan amount including the lump sum interest.
How the reverse mortgage works
A reverse mortgage is the complete opposite of a regular mortgage. It is aimed at retirees whose net worth is tied up in independent or acquired real estate. If they feel that their current expenses are higher than their current income, they can opt for these loans. You don’t need to have a good credit rating to qualify for this loan.
The State Bank of India, the country’s largest lender, offers reverse mortgages to people aged 60 or older. The applicant can choose a duration between 10 and 15 years according to his age.
What loan can you benefit from
Typically, lenders offer up to 80% of the property’s value as a loan over the life of the annuity. For example, if the lender appraises your property at Rs 50 lakh, he will sanction a loan up to Rs 40 lakh which will be paid in annuity. Some lenders also give part of the loan as a lump sum at the start and the rest in annuity payments. It should be mentioned here that ancestral property does not qualify for a reverse mortgage.
If the market value of the property increases in the meantime, the borrower can also ask for a top-up. However, if the reverse happens (the property’s value goes down), the lender can negotiate a lower payment or shorter terms. When sanctioning the loan, the lender comes up with a “forced sale value”.
The biggest advantage of a reverse mortgage is that the borrower realizes the full value of their property while using it as a residence.
Paying off a reverse mortgage
After the death of the borrower and his spouse, the lender seeks to cash the mortgaged property to recover the loan amount as well as the accrued interest. If the legal heir wants to recover the property, he must pay the full amount owed and take possession of the property. In the absence of a legal heir, the bank sells the property at auction. If there is a surplus from the sale after the loan is settled, this amount is returned to the legal heir.
The borrower can also claim his property after the end of the loan term by paying the entire loan amount along with the accrued interest.
The interest rate for a reverse mortgage is usually higher than that for a normal mortgage. These loans are issued at variable rates. Currently, the SBI charges the general public the EBR (External Reference Rate) plus 240 for reverse mortgages. SBI’s EBR at present is 6.65%. This means that the reverse mortgages from SBI will cost you 9.05%. For SBI retirees, this rate is EBR plus 140 basis points.