Income from your home

Before opting for a reverse mortgage, run a check list on these downsides and decide if it’s worth it

Pushkar Mehta, 60, is looking forward to a stress-free retired life. His three children are well settled and there are no loans left to be repaid. The only problem is that his retirement kitty has been reduced to provident funds (including Public Provident Fund), gratuity and a few pension plans purchased in the last few years. What gives him comfort is that he can unlock the value of his house through the reverse mortgage route.

When he first learnt about the ‘Reverse Mortgage Loan (RML)’ - the concept of receiving a monthly pension (annuity) by mortgaging your own home - it sounded like a real boon. But, with his house being the only asset, he wants to be doubly sure if there are any specific things he should look at before committing to this scheme.Here’s a look at some of these:

Sacrificing home ownership
In a typical RML, a home-owner (also called mortgagor) borrows against his home in return for a lump-sum or monthly annuities from the lender. Those, who are emotionally attached to their property need to evaluate if going in for an RML is worth sacrificing ownership. Once signed, the lender institution will be the rightful owner, once the owner/spouse passes away.

Costs involved
Despite losing ownership, the mortgagor is still responsible and liable for the municipal taxes, insurance and maintenance charges attached to the home. One also has to pay costs associated with such a transaction, such as obtaining title verification, search report from the bank’s empanelled advocate and compulsorily executing a will in favour of spouse only. All these costs add to the expense of the mortgagor. Remember, these costs will eat into the income from the bank/financial institution.

No estate planning
Though the property goes to the lender only after the last surviving borrower dies or opts to sell the home, the mortgagor cannot pass it on to any of his/her legal heir. Consequently, legal heirs can no longer claim rights to ancestral homes that have been in the family for generations. If he wants to retain it, he needs to repay the loan to the bank. This could be quite expensive sometimes and out of the reach of the legal heir.

Higher interest rates
RMLs are actually rising-debt loans, since the interest accumulates every month and keeps compounding with time. Say, the loan amount is restricted to 90 per cent of the value of the property, wherein the loan amount will include interest till maturity. For a loan amount of Rs 1 crore (with a property value of Rs 1.11 crore) at today’s rates, the mortgagor is entitled to receive a monthly payment of Rs 22,500 for 15 years - totalling Rs 40,50,000 over the tenure of 15 years. If the mortgagor opts for a lump sum payment, he gets approximately Rs 21.6 lakh only. Banks justify the high interest cost as they don’t earn any interest or income till the loan becomes due or the home is sold.

Limited money received
The mortgagor is not allowed a second mortgage or any other loan on the same property. So, any reckless spending of this money would mean a double hit -- losing the money and your property. This money should not be used for speculative, trading or business purposes.

A reverse mortgage can be a wonderful solution for those with no dependants. It makes sense to look for cheaper alternatives to borrow money than doing away with your home. Better still, ensure you start working towards the necessary retirement corpus while still young and actively employed.

The writer is a certified financial planner