Income for sunset years : CEO, BankBazaar.com in Business Line

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Reverse mortgage can get you cash flows, but with strings attached

For most of us, our home is the biggest equity because it is paid off by the time we retire.

Naturally, this asset can be used to earn extra income for our sunset years.

Reverse mortgage, where you pledge your property to banks and they pay you a certain monthly amount in lieu of the property, is a good option for senior citizens.

Eligibility criteria

First, since banks lend money to you against your property, you obviously should own the property being reverse mortgaged.

If the home is taken on loan, the loan should have been paid off in full.

Second, a reverse mortgage loan is given to senior citizens only. Hence the home owner should be at least 60 years old to benefit from the scheme. The spouse should be at least 58 years to be eligible as co-owner. Besides the property’s value, the interest rate, the bank’s loan-to-value, and the borrower’s age influence the amount of loan received.

The pros and cons

The major advantage of reverse mortgage is that it supplements your income, especially if your pension is insufficient to meet all expenses. Reverse mortgage provides a good alternative to cover medical expenses, emergencies, and adds to contingency funds.

The second advantage is that since you always owe the bank a sum not more than the value of your home, you do not have to worry about payment at the end of the tenure. Even if the bank has paid more than the value of your home, your liability is limited to the value of your home.

Third, even if the loan tenure has expired, the occupants can continue to live in the same house. They will not receive the monthly payments from bank but they will have their home till the last survivor’s death.

Even after that, your heirs have the option of paying off the debt and reclaiming the property. Finally, there is no tax on the income received from reverse mortgage. But while all this sounds good, in practice, reverse mortgage may not deliver all it promises. For one, expenses such as closing cost, insurance, and origination fee can reduce the amount you receive, as they are deducted from the value of the home. Moreover, banks tend to price these mortgages unattractively. The amount you receive may not match your expectations. Besides, the loan-to-value ratio can be as low as 60 per cent.

This means if you have a home worth ₹1 crore, the bank will provide a reverse mortgage only for ₹60 lakh.

This has to be distributed over the tenure with time cost of money taken into account. Reverse mortgage also requires lengthy documentation and is far more complex than taking a home loan.

Helpful pointers

Banks re-evaluate the value of your property at regular intervals which could impact your monthly inflow.

Check with banks from time to time to see if there is any change in value.

Do not borrow more than you need. Your goal should be to complement your pension. With increased lifespan, you may need more money. Exhausting all your options now can come back to haunt you in the future years.

The writer is CEO, BankBazaar.com