Many of our recent generations have worked and purchased a house with their retirement benefits. Mortgages (home loans) were seldom available, and there was a natural aversion to being in debt. Historical wisdom may be a reason for this.
“Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” Hamlet, Shakespeare
Not many of us have pensions and age and the effect of inflation impacts money in our wallet. Returns on limited funds may not cover the high prices of domestic necessities like food and medication. We may often be hard pressed for cash, though we have assets, especially a home.
Tradition and a sentimental desire to own a house at least at the time of retirement has guided people to add a home to the other passions of gold and bank fixed deposits. Besides a roof above the head, the home can provide a monthly, quarterly, half yearly or annual cheque even as you continue to live in it.
In recent years Indian banks have introduced “Reverse Mortgages” – available only to senior citizens (aged above 60, or if jointly, with a spouse who is above 55 years). A simple concept – while a mortgage is buying a property with a bank loan with the property pledged to the bank, a “Reverse Mortgage” is pledging the property (currently not having any loan on it) to a bank.
Just as a home loan involves paying a monthly “equated monthly installment” to the bank, reverse mortgage has the bank pay a monthly amount to the borrower, against security of the property.
The period for a Reverse Mortgage loan is up to 20 years. The value of the Reverse Mortgage can be for a maximum of Rs 2 crore. 90 per cent of the value of the property in metros, 20 per cent in urban areas is offered as loan value. The amount of loan will depend on the market values of the residential propriety of the senior, age and prevalent interest rate (interest rate is similar to home loan rate). The rate could be floating or fixed rate, as opted for by the borrower.
A monthly payment is made by the bank, to the home owner, subject to a maximum of Rs. 50,000 per month. Lump sum payments may also be made, restricted to medical exigencies and capped at 50 per cent of amount eligible with maximum quantum being 50 per cent of the eligible loan amount, and capped at Rs 15 lakhs. The amounts are based on the value of the property. The home owner continues to occupy the property during his and spouses entire lifetime. The property is revalued every 5 years and the payout would be modified based on the current valuation.
On the death of the senior citizen availing Reverse Mortgage (or on permanently vacating of the residential property), the loan is repaid with the interest accumulated, by the heirs of the person or by selling off the property. They are normally given 6 months to refinance (take home loan) or otherwise repay the outstanding on the loan.
Why is this important to you?
Cash flows will ease your retirement. This will be like a pension/rent that you receive. You continue to occupy the house (the government rules ensure that you cannot be put out of the house during your lifetime). Your heirs will have responsibility towards a property you have created, by paying a part of its value.
The author is CEO & Founder, Right Horizons.