Reverse mortgage as a retirement plan
Real estate investment as retirement plan
Retirement planning is an integral part of any good personal financial plan. You need to think of your post-retirement days and plan your investment options accordingly so that you can lead your life ease in your autumn days.
Investing in real estate is a safe option in India as high returns are anticipated. Investing in real estate for fulfilling the needs of your post-retirement days is an excellent option. Reverse mortgage can be the means through which real estate investment can take care of all your post retirement needs, although it may not quite be the normal maneuver for us Indians, especially as we are accustomed to build our homes in the prime of our life and intend to leave it for our heirs.
What is reverse mortgage?
Reverse mortgage is a relatively new concept in India. It is the reverse of a regular mortgage scheme and is a well-considered wealth planning scheme in developed countries. In a regular mortgage scheme, you borrow from bank or housing finance companies to pay up for the house and then pay back the loan in equated monthly installments (EMI) over a particular tenure. Under reverse mortgage, you pledge your property with a bank or housing finance company and receive monthly installments against it for a period. At the end of the tenure, the house is sold to settle the dues.
Under reverse mortgage,you can opt for a monthly, quarterly, annual or lump-sum amount at any time. As property prices keep appreciating over time, revaluation of the pledged property has to be undertaken by the bank or HFC once in five years.
How to repay the loan in a reverse mortgage scheme?
Under reverse mortgage, the loan is not paid during your lifetime. As no payments are made during the term of the reverse home mortgage loan, balance of your loan increases over time. The loan becomes due for repayment once the loan term is over or after your demise.
Afterwards, based on the will of the homeowner, the pledged property is retained by your legal heirs. They would have to take responsibility for settling the loan or else the bank would sell off the property and use the proceeds to settle the loan amount. After selling off the house, the remaining amount is distributed among the heirs.
Advantages of reverse mortgage scheme
(1) It is a type of income that people can make use during their post retirement days.
(2) Even if you are down on your credit worthiness, it does not matter as you do not need to make any payment and the bank would not check for it.
(3) Since it is considered as a loan and not an income, it is exempted from tax liability.
Disadvantages of reverse mortgage scheme
In India, we consider houses to be assets passed on to our offspring. Hence, reverse mortgage has not been accepted in a positive manner. The Housing Finance Companies (HFC) have also stayed away from promoting the schemes, despite being brought in the spotlight by the Finance Minister of India in 2007.
According to the schemes devised by National Housing Bank (NHB), reverse mortgage borrowers have to be at least 60 years old and possess 100 per cent ownership of the property.
Rate, tenure and scope of reverse mortgage scheme
Most reverse mortgage schemes have a fixed interest rate between 12-14%. Although most of the schemes have the maximum tenure of around 20 years, banks usually shorten the tenure to 15 years. In case, your spouse is a co-applicant in the scheme, then her/his minimum age has to be 58 years. On the completion of the tenure, annuity payments stop. However, you can continue to live on the property.
All most all the major banks and housing finance companies in the country – State Bank of India (SBI), Punjab National Bank (PNB), LIC Housing Finance, Corporation Bank, Andhra Bank, etc. offer reverse mortgage schemes in the country.
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