In the realm of financial instruments, Loans Against Property and reverse mortgages have emerged as popular options for homeowners seeking to monetize their real estate holdings. Since both loan schemes are transacted against tangible real estate assets, it is important not to confuse the two. Let’s talk about the similarities and the differences between Loan Against Property and Reverse Mortgage. In both cases, they serve the purpose of providing financial assistance backed by real estate collateral; the borrower retains ownership of the property in both instances, unless the loan cannot be repaid. In this case, the property is seized by the bank and auctioned off in order to recover the dues. This is really where the similarities between Loan Against Property and Reverse Mortgage end. Now let us talk about the differences. They differ significantly in terms of their structure, repayment obligations, and overall financial implications. Understanding the nuances of each option is crucial for homeowners to make informed decisions that align with their specific needs and circumstances.
Loan Against Property
A loan against property, as the name suggests, is a loan secured by the borrower's residential or commercial property. The borrower retains ownership of the property while receiving a lump sum of money from the lender. The loan amount is typically determined by the appraised value of the property, with loan-to-value (LTV) ratios ranging from 70% to 80%.
Key Features of Loan Against Property:
- Borrowers receive a one-time payment, which can be used for purposes based on the kind of property set as collateral. If a commercial property is set as collateral, you can use the loan for business expenses only, such as expansion or debt consolidation. If a residential property is set as collateral you may use the funds for personal expenses such as medical bills, education or debt repayment.
- Loan Against Property can be availed at fixed or flexible interest rates. Fixed rates offer predictability in repayments, while flexible rates may fluctuate with market conditions.
- Loan Against Property typically have a repayment tenure of 10 to 20 years, with monthly instalments.
- Depending on the type of property, the borrower may claim tax benefits and exemptions on the payable interest on the loan amount.
Reverse Mortgage
Reverse Mortgage is a home loan for pensioners and retirees over the age of 58 (female) to 60 (male) years, exclusively. The bank does not issue a lump sum amount directly, rather it provides a regular income, amounting to a total of up to 80% of the property’s appraised value. It is a means to supplement the retirement income of senior citizens, in addition to their pension or equity, if they have any. Since the borrowers are generally in the twilight of their lives, they are not expected to pay back this amount to the bank and there is no home loan minimum tenure. Rather, this debt is incurred by their children or wards who have the option to either pay off the loan or allow the bank to take ownership of the property to auction and recover the dues.
Key Features of Reverse Mortgage:
- Reverse mortgage provides a regular income stream, which can supplement retirement savings and enhance the financial security of a senior citizen who is possibly of ill health.
- Periodic payments from the bank to senior retirees are not classified as income and are hence tax exempt.
- Borrowers are not obligated to make monthly repayments, allowing them to enjoy their retirement without the burden of debt.
- Repayment of the loan is the responsibility of the children of the borrower, upon their demise.
- The amount issued by the bank equates to up to 60% of the appraised value of the property or a maximum of 2 crore rupees with 8.05% rate of interest as advertised by SBI as of 2023.
Which is more preferred- LAP or Reverse Mortgage?
The popularity of Loan Against Property and Reverse Mortgage in India varies depending on several factors, including age demographics, financial literacy, and cultural norms. Loan Against Property have traditionally been more popular due to their flexibility and wider eligibility criteria. However, Reverse Mortgages are gaining traction as awareness increases and the senior citizen population grows. According to a 2022 report by ICRA, the Reverse Mortgage market in India is expected to witness a CAGR of 15-20% over the next five years, driven by factors such as rising life expectancy, increasing property values, and a growing need for financial security among senior citizens.
Factors to Consider When Choosing Reverse Mortgage
Before considering a Reverse Mortgage the borrower(s) should carefully assess their needs, financial circumstances, and future plans. Here are some key factors to consider:
Age: Reverse Mortgages are specifically designed for senior citizens aged 60 and above.
Financial needs: Consider whether a regular income stream is really necessary to supplement financial strength. Keep in mind that there is no risk of overdraft against property but you might just not get a fair valuation on the property.
Inheritance: Consider the potential impact on inheritance plans and whether the property needs to be passed to the heirs or not. Seeking Professional Guidance
Given the complexities of both Loan Against Property and Reverse Mortgage, it is advisable to seek professional guidance from a financial advisor or mortgage specialist. They can assess individual circumstances, provide personalised help and care. Especially for senior citizens who can be easily taken advantage of.
