Reverse mortgage an option for the senior citizen to convert their one big asset their home into a source of regular income without giving up the ownership.
It is exactly the opposite of a typical mortgage, such as a home loan.
Under this individual pledge, a property to the bank he already owns and in turn receives either lumpsum or series of cash-flows for a fixed tenure.
Will try to understand the feasibility of this option with a case study-
Mr. Sakhrani a 63-year-old retiree has a fixed pension of Rs 15K per month lives with his wife in Jodhpur. They have 2 married daughters and 3 sons who stay in Dubai and Russia respectively.
Mr. Sakhrani has a general monthly expense of Rs.25k per month and an additional Medical Expense of Rs.5K per month. During his accumulation phase, he invested in many LIC policies and Retirement Plans.
After his retirement, he was expecting to get a handsome amount of lumpsum with a good return of at least 8% p.a. as promised by the policy agent while selling the policy.
The income on which he was planning to rely after his retirement. He is dissatisfied with the amount of lumpsum he received with the return of 4.8% p.a.
He is an independent person and will not take money from his children for regular household expenses and medical care.
His friend suggested that opt for the reverse mortgage. Should he?
Mr. Sakhrani found this product quite interesting and tried to understand the pros and cons of this product.
Any senior citizen opting for a reverse mortgage will get the annuity from the bank for 15/20/25 years as per the feature of the contract entered.
Based on the demand of the property, the condition of the house, and the current property prices the lender will disburse a loan amount usually around 60% of the value of the property.
The periodic payment received through a reverse mortgage is considered as loan and not income; do not attract any income tax or capital gain tax.
No repayments are made during the life of the borrowers.
The owners of the house and his/her spouse continue to live in the house till their death- which can occur later then the tenure of the mortgage also if one dies another can continue living in the house.
On their death, legal heirs will have to option to pay back the loan and retrieve the house or let the bank take over the property.
After considering all the above points Mr. Sakhrani did some inquiry with his bank RM and tried to understand how much he is going to receive on monthly basis-
House value- 80 lacs
Interest Rate on Loan- 9.05%
Tenure of Loan- 15 year
An approved lending institution approved to provide the loan to value ratio of 60%.
He will be eligible to receive a mere Rs.12500 every month for the next 15 years
Now, to understand the feasibility of this option he compared this with the normal mortgage.
If in a regular loan, borrow Rs 80 lacs for 9.05% for 15 years the monthly EMI would be Rs. 81380.
“If you want to know the value of money, go and try to borrow some” – Benjamin Franklin
As you can see the difference between what you are getting and what you would pay for the same loan is way too high.
So, after considering the above case study we can conclude that Reverse mortgage should be a last resort and not a routine form of financing cash requirement for senior citizens.
We should be very careful in our accumulation phase and try to understand well how much we are going to need for our peaceful retirement. Your investment should be specific to some goal. It’s always good to take professional help for your investment.