Friday, April 17, 2009


WE all know the importance of having a retirement fund which will take care of our expenses after we retire. Most of us are advised to start early at retirement fund so that with time it gains weight and becomes substantial by the time we retire. But what if someone hasn't been so prudent to start early . What if someone is due to retire soon and does not have any retirement fund so to speak. What are his options.Well I must admit that its a terrible situation to be in. However, there is a ray of hope for all such people ,if, they have a house in their own name. For all those senior citizens , who own a house , reverse mortgage is the solution to their post retirement worries.
What is reverse mortgage ?- Reverse mortgage is the concept of pledging your self owned house to a financial institution who then makes you a loan basis the house value.This is just opposite of mortgage. In mortgage, the lender receives money every month in the form of EMI, whereas under reverse mortgage its the borrower who receives the money from the lender monthly. This is because under reverse mortgage, the bank does not extend the loan amount as a lump sum to the borrower. Rather , it pays the loan amount in the form of annuity.The lender will continue to charge interest rate on this money which is to be repaid by selling the house.
How does it work? -The lender makes a loan basis the house value to the borrower. This is typically 45-60% of the loan value. The loan is then given in the form of fixed monthly payout to the borrower rather than at one go. The borrower need not pay anything back to the lender.Interest as well as the principal keeps on accumulating . The lender will keep on paying the payout for the tenure(15 years in India) after which the house is sold and the lender settles his account.The balance is returned to the heir.For example, if the total outstanding of the bank considering the principal and interest is lets say Rs 50lakhs and the value of the house is Rs 75 lakhs, then the bank will take Rs 50 lakhs out of the sale proceeds and the remaining Rs 25 lakhs will be passed on to the legal heir.
What are the terms and conditions? Following are the basic terms and conditions of reverse mortgage:
- House in own name.
- Minimum age of 60 years.
- Maximum tenure of 15 years
- The interest charged can be fixed or floating .
- LTV (Loan to Value) for loan is 45-60% of house value.
- Assessment of house value if done every 5 years.
Who are the major lenders in India?
In India reverse mortgage is being extended by following banks/institutions as of now
National Housing Bank (NHB)
What are the tax implications of the monthly payout received ? We all know that the pension received in India is taxed, but, in case of reverse mortgage there are no tax liabilities , simply because it is treated as a loan and not as a tax.
What happens after the tenure i.e.15 years is over? The loan tenure is for 15 years after which the payout is stopped. The person can continue to live in the same house till he desires and his house will belong to him. The interest on his loan will keep on accumulating till the time the loan is paid back. The loan is paid back after the death of the person or if he gets some money from other sources by which he can settle the dues.In case of death of the person, the bank will sell the house and recover its outstanding principal and interest due and the balance money will be passed on to legal heirs.
Who should opt for it? Reverse mortgage is meant for every senior citizen having a clear title house but it will be most useful for people who have not been able to build substantial corpus for retirement, or for those who don't have any other source of income. People who don't have kids supporting them will also benefit from this scheme.

1 comment:

  1. Reverse mortgage is a useful estate planning tool that banks and financial institutions ought to offer making available to seniors. It's a great security for them to ensure the delivery of their pensions in the amounts they thought forthcoming.