Tuesday, January 3, 2012

[www.keralites.net] Reverse Mortgage - An additional source for retirement income


Have you missed the chance to save enough money for your post retirement?   Is your retirement planning an utter failure?  Are you not getting the expected financial support from your children during your post retirement life?    Are you late in your retirement planning? Don't worry….  There is a solution, if you own a house.    Please read the full article to understand how you can use the Reverse Mortgage Option to find enough money for a better and hassle free post retirement life.
Buying a home may be the largest investment the home owners ever make.  In India, most of the people consider owning or residing in a luxury house as their status symbol.   Everybody finally will agree one thing that, this is a dead investment; earning nothing for your retirement life instead you need to spend lot of money for its routine maintenance, paying municipal and other taxes (applicable only for those who have not made enough investment for their retirement life).   But this concept is slowly changing with the introduction of Reverse Mortgage Schemes by banks and housing finance institutions.  Getting into old age without proper financial support can be a very bad and problematic experience. The rising inflation/cost of living, medical, other amenities compound the problem significantly. No regular incomes, a diminishing capacity to work and earn livelihood at this age can make life more miserable. Indians are sentimentally attached to their homes and while some homeowners in their retirement may get lucky with their supporting children others may not be that lucky.  Why you want to care your grown-up and earning children, if they are not bothered to take care your daily needs.  This is an old concept; we need to change this thinking. Old age is a reality and can be very challenging, or rather miserable, when there is no financial support from any source.   A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. Many leading banks and housing finance institutions have come with up an ideal solution for such senior citizens in the form of reverse mortgage in India.  This scheme originated in the United States and has gained popularity in the West since its inception. Reverse mortgage, as the name implies, is a kind of loan through which you get regular income without interruption throughout your life in return for pledging a property; primary target consumers being the senior citizens (persons above 60 years of age). Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in their names, but they were not able to convert it into instant and regular income stream due to its illiquid nature.  Reverse mortgage is one of the solutions for this problem.
Presently all most all banks in India are offering this reverse mortgage options. The rate of interest charged varies from bank to bank, but the current rate ranges between 9.5% and 11.5%. The borrower also has to bear some expenses related to loan application processing charges, property valuation and legal charges, for availing of the loan.  In most of the cases, the loan amount would be 60-70% of the present market value of property. There are two options, the borrower can either opt for  taking the loan principal as a lump sum or opt to receive  fixed monthly installments for his/her life time. After the death of the borrower, the surviving spouse can continue to occupy the property till his/her demise while getting the same benefits.   The bank/financial institutions will conduct valuation of the pledged property from time to time. If the valuation has increased, the borrowers are given the option of increasing the loan amount.. If they have opted for the monthly payment scheme, this amount is increased proportionately
The following chart shows  the amount of monthly installments (calculated on "Reverse Annuity" basis) to be paid to the senior citizen borrower for different tenors of loan per Rs. 100,000.00
Tenor (yrs)
Monthly Installment (Rs.)
                                                               Data Source- PNB website
Main features of the scheme
  1. Any house owner over 60 years of age is eligible for a reverse mortgage by way of pledging their residential property
  2. The maximum loan is up to 60-70% of the value of residential property.
  3. The maximum period of property mortgage now extended to life time of the borrower, earlier, the period of loan was limited to  20 years.
  4. Foreclosure of the loan is not allowed
  5. The bank will decide the value of the property and decide the amount of loan.
  6. The borrower start receiving monthly/quarterly installments which are tax exempted. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
  7. Sale of the property is allowed only after the death of the borrower
  8. The borrower need not return any amount during their life time. The bank will recover the outstanding amount with interest from their legal heirs. Their legal heirs will get the first option to clear the loan and retain the property. If they are not interested, then, the bank will sell the property to realize their due and balance if any will be given to the legal heirs.
  9. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion subject to the terms and conditions of each bank.
  10. The revaluation of the property has to be undertaken by the Bank or Housing Finance companies (HFC) once every 5 years.
11.  After the death of the borrower, the surviving spouse can continue to occupy the property till his/her demise while getting the same benefits. 
  1. The rate of interest charged varies from bank to bank, but the current rate ranges between 9.5% and 11.5%.
Mortgage Backed Annuity Products from Insurance Companies
Mortgage backed annuity product can ensure that the monthly payments continue till the death of last surviving spouse. This is better compared to the old scheme. Insurance companies by virtue of their long-term horizon and nature of business are perfect partners for banks offering a reverse mortgage product.  Banks, which typically operate with funds of between one and five years maturity, are unwilling to take a call on how interest rates will move in the long term. Now, the stage is set for tripartite agreements that will give a fillip to this new product.
Take a look at this example:
Mr and Mrs  Ram  aged 65-years and 60-years, respectively, own a property worth Rs 50,00,000.00 as per bank valuation based on market value. The bank would sanction Rs. 30,00,000.00 being 60% value of the home as reverse mortgage.   Here Mr. Ram has the option of taking the loan principal as a lump sum at one go or as fixed monthly installment.  The bulk amount of Rs 30 lakh is transferred to an  insurance company which will pay a fixed annuity till the last surviving spouse.   Annuity received from the insurance companies will be treated as income whereas the monthly mortgage amounts received from Banks are treated as loan.
Note: this article is just for the general information of the readers.  The terms and conditions and interest rates related to reverse mortgage is subject to change.  Please contact your financial adviser or your bank for more information and guidance.  
Best Regards
Prakash Nair


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