Reverse Mortgage

So you have invested in retirement funds, with an assumption that you will receive X amount after you retire. But on the eve of your retirement you realize that the retirement funds are actually just a pittance. The options at that time are limited; sell the house and live off that money in a smaller house, or give house to the child and live with him/her.

After investing so much money in a house and building an asset, it is very heart breaking to sell off that asset. After all you have gone through so much of pain to build it. It also becomes difficult to shift to a new location after retirement. And living with children is not something most modern-day retirees want to do, as it means compromising on their independence. Also with nuclear families and jet-set lifestyles becoming the norm, many people find it hard to devote time to their parents.

Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities significantly compound the problem. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But how is it possible?

The reverse mortgage scheme offered by some leading banks / housing finance companies could bring the required answers to the sufferings of senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream.

Mortgage is nothing but a loan. When we need money we take a load. When we repay a loan the loan component decreases. This is the traditional way in which we look at loans. In Reverse Mortgage, we can take a loan say lump sum or as an annuity against an asset. At the end of the term, if you have the money repay or the asset will be sold to recover the loan amount with the interest and the balance would be refunded. Reverse mortgage is a scheme which is usually formulated to benefit the senior citizens.

Reverse mortgage is a type of home loan product designed for the senior citizens by converting their fixed asset - their home or in banking terms their equity in any house property into an income channel without having to sell their equity in case of any requirement.

It usually involves two parties, the borrower - the senior citizen and the lender - any bank or housing finance institution.

The borrower pledges his house property to a lender, without worrying about any other security.

In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower as per his needs.

The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company, and the bank or Housing Finance Company pays the person a regular payment. The good thing is that the person who ‘reverse mortgages' his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it. The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the place, and to recover the loan. It passes on any extra amount to the legal heirs.

The guidelines of reverse mortgage as prepared by RBI have the following salient features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60% of the value of residential property.
• The maximum period of property mortgage is 15 years.
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs.

Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
Thus by investing in a house through a housing loan and repaying the loan during his working life time, one will not only have a roof over his head throughout his life time, but also secure a joint life pension, that keeps in step with inflation, after retirement. Seen in this perspective, reverse mortgage would motivate people to build or buy their homes and, thereby, save for their retirement voluntarily. Hence reverse mortgage helps increase economic activity by more people taking a load to build a house and provides economic security through reverse mortgage.