What you save and invest through your earning life has to also fund your post-retirement years, which stretch nearly as long as the former these days.
You need a bouquet of investments to see you through and one way is to unlock investments you have already made.
First things first, you could be drawing a pension from your employer, have provident fund proceeds, National Pension Scheme or annuity policies. Of course, you could be having a post-retirement job or consulting income and your investments will be fetching you returns.
You would most certainly own your own home and that presents you with one more way to add to your income at this stage.
A reverse mortgage is simply a loan against your home under specific circumstances. The basic requirement for this is you should be over 60, you should own and live in the home you are going to mortgage. The bank will create a mortgage on the property and give you a loan against it. You can take it in a lumpsum or at monthly, quarterly, half-yearly or annual instalments.
You get to stay in the same home and don’t have to vacate. You don’t have to pay interest or even pay back the principal amount. When you pass away, your nominee/ legal heirs will get what is left of the value of the home after the bank collects its principal and interest.
Reverse mortgage as a product has been available for over a decade-and-a-half but has not caught up much. There are a few touted reasons. Indians love to will their homes to their progeny so this option did not sit well culturally – well that is changing in significant pockets.
The mortgage value is only a part of the property value and the tenure is only a maximum of 20 years and what about the income after that and what about settling the loan?
Social trend
We are going through a social trend where a certain category of investors can see this as a welcome flexibility.
Let us say your home is worth ₹1.5 crore. Banks will lend you a certain percentage of this value depending on various factors, especially the market price and perceived future appreciation of the property. Let us say, they offer you ₹1 crore. The interest rate on this is typically 1.5 to 2% higher than for a typical home loan.
Loan tenure
Another downside is that loan tenures are at best for 20 years. At that point you have to repay the loan or allow the bank to recover your loan by selling the property.
Should you die before the tenure of the loan, the outstanding will be the liability of your legal heirs, and the residual value of the property, their asset. Since you don’t repay principal or pay interest the dues to the bank at that point would have ballooned quite a bit.
Today’s home loan rates are 6 to 7% and a leading bank offers reverse mortgage at a little over 9%. Nine per cent simple interest on ₹1 crore over 20 years would make the total outstanding closer to ₹3 crore. If you apply compound interest, the outstanding would hit ₹3 crore as early as in the 13th year and be almost ₹6 crore by year 20. (I have calculated the interest as if the loan was given as one lumpsum and not over the 20-year period just for easy calculation.)
You have to adjust this for two factors. One, the market value of the property could have appreciated in the 20 years and the repayment to the bank may still leave you with residual value. Whether a property of ₹1.5 crore today will fetch you ₹6 crore and then some in 20 years is a view you have to take.
Of course, we have seen it happening, but the real-estate markets have stagnated too, the pandemic being the most recent trigger.
The second is that the payments you receive are loans and are not taxable. Add the non-financial advantages that you get to stay in your home for your lifetime even if the loan tenure is over and don’t pay rent because, well, it’s your property.
The reverse mortgage offers this coverage up to the death of your spouse as well.
Annuity option
A variation of this is the reverse mortgage linked to an annuity policy.
Annuities are periodical payouts from a pension policy purchased from a life insurance company. It is an insurance, a financial hedge against the risk of living too long.
Annuity incomes, as you know, are taxable as income. However, there is a specific exception for annuities that are part of a reverse mortgage and they are not taxable since 2013. So, this puts the annuity option on par with the loan option in a reverse mortgage.
In the annuity option, the lumpsum loan, ₹1 crore in the example above, is given to the life insurance company to purchase an immediate annuity. Annuities have many options ranging from annuity for whole life to specified tenures and the purchase price you pay for them varies accordingly.
This flexibility with the tenure of the payments you will receive gives the annuity option a few extra points.
Both the limited quantum of the reverse mortgage and the limited tenure can be seen as negative points. But they can be seen as positive as well. If you look at it as an option that unlocks your property value for the first 10 to 20 years of your retired life, consolidating your assets after that including selling off real estate holdings and moving to a retirement community, these two factors actually give you the flexibility for that. The high interest rate is also a negative, but if you are planning to use this as a stopgap as you wait to liquidate other real estate holdings at your own pace, it could work.
You could pay off the mortgage, liquidate your property and distribute the proceeds to your near and dear in your lifetime. Or, let them pay the mortgage or work with the bank to liquidate the property and claim the residual value.
A recent WhatsApp conversation centred around a trend where a growing category of wealthy middle-class senior citizens are finding their progeny, being highly successful in their careers and geographically dispersed and mobile, want neither to inherit landed property back home nor the bother of liquidating them after their parents’ lifetime. If you belong to this category of people, consider a reverse mortgage as a means of monetising your home. At the end of your lifetime you will even have the services of the financial institution which will sell the property, adjust its receivables and give the residual value to your nominee/ legal heir!
(The writer is a business journalist specialising in insurance & corporate history)
