Just for sunset years
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Investment in a house not only appreciates but also allows you to enjoy income tax benefits on repayment of home loans. It may also turn out to be your saviour in your twilight years with reverse mortgage, says R. P. DESHPANDE
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Photo : R. Shivaji Rao
For a comfortable life: Your house could come in handy after retirement.
Old timers believed in the adage that a son is the best walking stick for an aging parent. With rising nuclear families in today’s society, this may no longer make any meaning, but with the need for being financially independent during one’s old age and the added sword of inflation staring at us, the increased life expectancy, although a boon, may yet be a bother when one has to strive hard for making financial arrangements.
Although much has been said about pension funds, there is no comprehensive social security system in our country to protect the elderly against economic deprivation. It is estimated that only 11 per cent of the working population is covered for pension schemes. Hence, apart from the self-employed, even the salaried may have to plan for their post-retirement financial needs.
However, with the introduction of reverse mortgage loan by major banks and Home Finance Companies (HFCs), there is light at the end of the tunnel. Periodic payments.
Reverse mortgage can be defined as a form of mortgage in which the lender makes periodic payments to the borrower using investment in the house property as security. It is a special type of loan offered to homeowners who are old, to enable them to convert the market value of their home into cash to finance their needs.
The basic condition is that the property should be self acquired and self occupied. In a normal home loan, you avail a loan in lump sum and repay the same in monthly instalments (EMIs), which consist of principal loan amount and the interest charged. In the case of reverse mortgage, the bank or HFC will provide you loan in instalments (normally up to 180 months).
If you are 60 years and above and own a house without any encumbrance on it, you would become eligible to get reverse mortgage loan. The property can be in your name or may be jointly owned along with your spouse. The property should be sound and the expected life of the building should be at least 20 years and above.
You need to offer the mortgage of the property as prime security to avail the loan. In addition, banks may seek a registered ‘Will’ from you and an affidavit clearly mentioning that during the pendency of the loan period you will not write one more ‘Will’; create any encumbrance on the property; and will not in any way dilute your right, title and interest in the property.
For people with no pension
Let us analyse the example of Murthy, who has just retired from a private company where there is no pension provision. He has exhausted all his savings and liquidated his investments for his children’s education and marriage.
The retirals in the form of Provident Fund and Gratuity run into a couple of lakh only. Till recently, he was a worried man pondering about his future without a regular income. Murthy had availed a home loan of Rs. 10 lakh to purchase a property worth Rs. 20 lakh, about 15 years ago, where he is living now. Last month he paid his last EMI of Rs. 10,150 and so has repaid the loan fully.
When Murthy read about ‘reverse mortgage’ in the newspapers, he decided to opt for the loan and approached the same bank where he had availed the home loan. The bank valued his property at Rs. 80 lakh and decided to take 75 per cent exposure of the property, i.e. Rs. 60 lakh. The bank offered him reverse mortgage at 12 per cent interest for a period of 15 years.
The monthly instalment Murthy would be getting is Rs. 12,000. Thus, he is able to generate the required income to lead his life, without selling his property, and continue to stay in the house.
Since monthly instalments received under reverse mortgage are treated as loan (not as income), there is no income tax applicable on the same, irrespective of whatever amount is received.
(The author is Director, Institute of Home Finance, Bangalore deshpanderp2007@gmail.com)
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