Reverse mortgage is a blessing for the elderly as it allows them to generate good income from their homes after retirement. What’s more, they can still continue to live in the same house till past the tenure of the reverse mortgage. Read on to know how this concept works

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 loan from a bank by mortgaging his house. In a conventional home loan, the borrower receives a lump sum at the beginning of the 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 property he owns for which the lender gives a series of cash flows for a fixed tenure.

THE ADVANTAGES

Consider the case of Prakash, a retired person. Prakash 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 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 Prakash. 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 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 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 loan and take possession of the property. If the heirs are not interested, the bank sells the house, and settles the outstanding loan. Any excess amount from the sale of the property is duly remitted to the borrower's heirs.

POPULAR ABROAD

Reverse mortgage is a popular in the West among senior citizens who want to tap their property for cash. Ashish Gupta outlines some legal aspects of reverse mortgage:

In the present day circumstances of cash crunch, property can be a valuable source of getting funds, without physically disposing off the property. As a concept, reverse mortgage is of immense use in unlocking the otherwise illiquid asset of property. Hitherto immovable property has been treated as one of the most illiquid assets. Reverse mortgage unlocks the liquidity potential of this asset. It helps the owner get a return from his immovable property, without having to part with it. The owner can continue with the possession of the property during his lifetime.

WHAT HAPPENS TO TITLE?

In case of a reverse mortgage, the property owner surrenders the title of the property to a financial entity. The financial entity doesn't pay the entire amount to the owner upfront. On the contrary, it pays out a regular sum each month for the agreed time.

HOW IS IT DIFFERENT FROM MORTGAGE?

Reverse mortgage is different from mortgage. Mortgage is a form of hypothecation of the property to a bank, as a security for a loan. A common form of security which a bank insists on is the mortgage of the house for which the loan is being availed of by the borrower. Mortgage refers to the transfer of interest in a specific property for the purpose of securing either the payment of money advanced or to be advanced by way of loan, or an existing or future debt. The transferor is called a mortgagor, the transferee is called a mortgagee, the principal money and interest that are secured by the mortgage are called the mortgage money, and the instrument by which the transfer is affected is called a mortgage deed. A reverse mortgage is available to those above a specific age. The aim is to use the property and make it generate a return while in use by the owner. The amount is paid out each month is for a specific period of time.

RISK OF FINANCIAL INSTITUTION

The financing institution has to bear the risk of the individual outliving the agreement. At the expiry of the agreement period, the monthly payments to the owner stop. The monthly payout depends on the value of the property, the term of the agreement and the rate of payment. The valuation of the property is to be done by experts. The entire payout mechanism calculation and computation depends on the law of probability.

Courtesy:- ET dt:- 30-10-2009