You might be wondering, what is this reverse mortgage? How does it work? How can it benefit me? Not to worry, I am going to answer in this article.
What is Reverse Mortgage?
The west started reverse mortgages many years ago. This product is not new in the mortgage world. It caters to senior citizens who have property in their names. The owner can then use the property to mortgage the bank.
Normally in typical borrowing, you need to pay the monthly instalment. Here’s what is interesting. In a reverse mortgage, you did not have to pay the monthly instalment. The bank will instead pay you. What the bank does is that they will do a market valuation on the property. After that, they will give the loan based on the margin of finance they are comfortable with. Typically, 50 to 60%.
Do not expect a high margin of finance as the bank has to calculate the future lending cost such as interest rate and property price. The loan must be repaid when the borrower deceased, refinance or sells the property.
How does the bank pay me?
Homeowners can choose either of these 3 ways to obtain their borrowing with the bank.
- Fixed monthly payment with predetermined no of months/years of payout.
- A lump-sum payment upfront
- A combination of both
Who owns the house?
Just like any mortgages taken from the bank, you are still the owner of the house. You mortgage the property to take out a loan. The agreement will stop when the borrower deceased, sells the house or refinishes to another bank.
How much does it cost?
Here are some of the costs that you will need to pay.
- Legal Fees
- Valuation fees
- Mortgage Insurance
- Monthly maintenance fee
Depending on the bank you applied to, some will advance the costs and put in the loan.
The pros and cons of Reverse Mortgage
In any mortgage borrowing, there are going to be advantages and disadvantages. Borrowers are advised to choose wisely when applying.
- Do not need to pay monthly instalments
- Funds can help borrowers with living expenses such as medical bills and debt repayment
- The fund can help homeowners enjoy their retirement.
- With the fund, homeowners will be able to maintain their current lifestyle.
- The closing cost such as legal fees and insurance can be steep
- The property will be a mortgage with the bank
Will Reverse Mortgage come to Malaysia?
Banks need a healthy mortgage portfolio. Reverse Mortgage will give them a new avenue to expand their products. Yes, I believe that one day we will have this product in Malaysia. The banks might tailormade reverse mortgages to suit Malaysians.
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