Real estate Property need not be an asset that has no liquidity. It is possible for senior citizens to live in a property they own and at the same time get a regular income from it through reverse mortgage. Kavita Sriram outlines how this concept works for the owner

Reverse mortgage was introduced in 2007 here. The concept is aimed at senior citizens who can generate income from their homes in their retirement years.

 

HOW IT WORKS   

 

If a senior citizen owns a house, he can avail a home loan from a bank by mortgaging his house. In a conventional home loan, the borrower receives a lump sum at the beginning of the home loan tenure. He has to repay the loan through monthly EMIs where a portion goes towards the interest component and the remaining towards principal repayment. The house is pledged with the lender during the debt tenure.

 

In the case of reverse mortgage, a senior citizen pledges a real estate property he owns for which the lender gives a series of cash flows for a fixed tenure.

 

ADVANTAGE OF REVERSE MORTGAGE   

 

Consider the case of Prabhunath, a retired person. Prabhunath purchased a two bedroom house in the heart of the city with his life’s savings. With no pension and any other regular sources of income, he is finding it difficult to meet his regular monthly expenses after retirement. The thought of selling his real estate property and moving into a smaller rented accommodation seemed to be the only alternative to free him from financial distress.

  

Reverse mortgage is a product designed for senior citizens like Prabhunath. Here, the property owned is pledged and for a fixed tenure (say 15 years) the senior citizen gets periodic payments.

  

Senior citizens don’t have to sell their assets to meet their living expenses. They can continue to live in the house  till past the tenure of the reverse mortgage.

 

QUANTUM OF INCOME   

 

Loan-to-value ratio means the percentage of loan that one will get for the value of the real estate property that is pledged. The typical loan-to-value ratio is in the range of 60 to 80 percent. If one pledges a property worth Rs 40 lakhs, the loan amount that he can get is Rs 32 lakhs, if the home loan-to value ratio is 80 percent.  

 

The income generated from reverse mortgage can be in the range of 12 to 15 percent.

 

REPAYMENT

 

In the event of demise of the senior citizen, his spouse is allowed to live in the house. After the demise of both, the banker will provide the legal heirs the opportunity to clear the outstanding home loan and take possession of the property. If the heirs are not interested, the bank sells the house, and settles the outstanding home loan. Any excess amount from the sale of the property is duly remitted to the borrower’s heirs.