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Difference Between Reverse Mortgage and Regular Mortgage Loans

Mortgage loans are secured credit options where a borrower lends money from a financial institution by keeping an asset as collateral. It is considered to be one of the most popular methods of large-scale financing in India, with credits like loan against property and home loans growing by 21.8% and 17.1% across the nation during FY 2018.

 

A reverse mortgage loan is a credit facility tailored towards the senior citizen and retired population of the country. Here, an individual mortgages a self-owned asset and earns interest against the same. It is a relatively new process in the Indian financial market, being introduced in 2007 to help retirees improve their everyday life and battle any financial shortcomings.

 

Difference between a reverse mortgage and regular mortgage loans 


1. Mortgaged asset – The primary difference between a loan against property and a reverse mortgage loan is the equity of a mortgaged property. 

In case of a regular mortgage loan, a borrower purchases a new house and repays the debt over a loan’s repayment tenor. One can also borrow funds to build a new property over a plot. Once the due sum is repaid, mortgaged properties ownership is transferred over to the borrower. 

In a reverse mortgage scheme, a borrower receives funds against the existing equity of a property that they already own. This allows financial institutions to pay a lump sum amount to the applicant, which he or she is not obligated to repay. Borrowers are also legally permitted to use that housing as long as they, or their spouse, is alive.

 

2. Repayment – Another crucial difference between a mortgage and reverse mortgage is its method of repayment. Mortgage loans are normal credits, where a borrower has to effectively repay the debt by paying equated monthly instalments throughout the loan tenor. In this case, the repayment amount consists of two different components, interest and principal amount.

Moreover, borrowers can also select between the types of payable interest, namely fixed or floating, while selecting a mortgage loan. Fixed interest rates are determined when an applicant applies for a credit, and stays the same throughout the repayment tenor. Floating interest rate stays market-dependent, any fluctuations in the base rate directly affects the rate of interest. 

In case of a reverse mortgage in India, the financial institution offers monetary assistance to a borrower in exchange for the ownership of a house. Borrowers can choose to repay their debt, or their next of kin can repay it, to hold the ownership of the property. It imposes zero defaulting risks as the funds are allocated after mortgaging a high-equity property itself.

Another difference between these two types of credits is the repayment sum. Borrowers only have to pay the total sum allocated against a mortgaged property, which depends on the market value of that asset, while repaying the credit. Borrowers do not have to pay any interest against the sum availed, making it more beneficial for individuals who do not have a source of income. 

 

3. Ownership – In case of a mortgage loan, the financial institution holds the ownership of a mortgaged house or a plot of land until the total due amount (interest and principal) is repaid. The repayment and ownership details are one of the most crucial things borrowers should know while availing a loan against property or home loan. If an individual fails to pay the amount during loan repayment period, ownership of the mortgaged property is transferred to the financial institution.

In case of a reverse mortgage loan in India, borrowers retain the right to use the mortgaged property until their demise. It is done to provide assistance to the senior citizen borrower; if the primary applicant of that loan passes away before his or her spouse, they hold the right to stay in that mortgaged property for as long as they require. 

Ownership is only transferred to a lender if both spouses pass away without repaying their debt, and no next of kin decides to repay the sum and retake the property.

There are several financial institutions that offer mortgage loans in India, including HFCs like Bajaj Housing Finance Limited, which provide loans to eligible applicants against affordable interest rate and flexible tenor. 

They also provide pre-approved offers that simplifies the applicant process and help save time. These offers are available on personal loans, business loans, home loans, etc. You can check your pre-approved offer by sharing only some essential details online. 

The above mentioned clauses are some of the most common differences between reverse mortgage and standard mortgage loans in India. Both can be utilised as an effective measure to mitigate financial requirements, as both come with zero end-use restrictions.

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