Reverse Mortgage – How it can help you on retirement?

In the last 4 articles, we were discussing various options on how to create sufficient money to ensure desired standard of living after retirement. If due to various reasons, you are unable to accumulate enough for retirement, don’t worry, you have reverse mortgage scheme to help you. Let us see how this scheme works.

In this scheme, you can pledge your house with a lending institution and receive periodic amounts within the value of house. Normally, the lending institution keeps a margin to protect their interest. So it is exactly the opposite of house loan where we get around 80% of the cost of house as loan and we repay by EMI and acquire the full ownership on repayment of entire loan. In reverse mortgage, as and when, we receive periodic payments, our ownership in the house decreases.

Am I eligible for Reverse Mortgage?

• You should have a house with 100% ownership.
• The residual life of the property should be at least 20 years.
• Generally, you should be 60 years of age or above to get a reverse mortgage loan. Your wife should be 55 or above.
• The amount of loan depends upon the market value of the property, age of the borrower (s) and the prevailing interest rate.

Reverse Mortgage – Repayment

You need not repay the loan during your life term. The lending institution will realize the outstanding due to them, through sale of the property if your legal heirs are not settling the amount.

Reverse Mortgage – Term of the Loan

 Normally the term of this loan is 15-20 years but if you and your spouse are living beyond this period, the lending institution will not initiate the sales process. They will do so only after the death of surviving spouse.

Can I foreclose a reverse mortgage loan?

Yes, you can foreclose the loan without any pre-payment penalty.

Can I ensure the monthly installment till lifetime?

 In normal reverse mortgage loan, the periodic payments will stop after the terms of loan say after 15-20 years. Even then, you can stay at the house till the lifetime of surviving spouse. But living at that advanced age without the monthly income will be difficult. In the new scheme, Reverse Mortgage is linked with an annuity of an insurance company.

In this scheme, the lending institution is giving the loan amount to an insurance company and this company will give annuity to the borrower. After the death of the borrower, the annuities are stopped and the insurance company will repay the loan amount (purchase price) to the financial institution. The interest has to be repaid by the legal heirs or it has to be realized from the sale of the property. However the surviving spouse has the option to purchase another annuity using this purchase price, for his/her life time. This will ensure that the periodic payment will continue till the death of the last surviving spouse.

Reverse Mortgage – Summary

1. You pledge your house and apply for a reverse mortgage loan.
2. The bank will decide the value of the property and decide the quantum of loan.
3. You start receiving monthly/quarterly installments which are tax exempted.
4. If you outlive the terms of 15-20 years of the loan, your monthly installment will stop but your wife can live in the same house and the loan will be due for repayment, 6 months after the death of last surviving spouse.
5. You need not return any amount during your life time. The bank will recover the outstanding amount with interest from your legal heirs. Your 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.
6. 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.

Even though, Reverse Mortgage is very popular in developed countries, the concept started in India in 2006 and still is in development stage. With increase in longevity and increasing medical costs, Reverse Mortgage can help those senior citizens who have not accumulated enough for their retirement.