The Hindu Business Line : Reverse Mortgage — Have your home and earn from it too

My uncle who retired a couple of years ago is a worried man. The money he saved in his working life does not yield him enough to support his expenses. Quite a bit of it goes towards medical bills. He has a three-bedroom apartment in an upmarket locality, which could fetch him around Rs 45 lakh. But where will he go if he sold the property?

How about living in his own sweet home and still earn enough money without selling it? Sounds interesting. The reverse mortgage scheme that recently hit the market is just for people like him, looking for a way to make their property earn for them.

Dewan Housing's `Saksham' is the first such product. The concept, however, is quite popular in the US. The National Housing Board has approved the product and the market could see more such offerings.

How does it work?

Assume you have a house worth Rs 50 lakh. You can get a loan for a part of the value of the property, usually 40-50 per cent. You can opt to receive regular cash flows or a lumpsum payment, depending on your need, for a specific period, say, 15-20 years. The amount will depend on your age, the value of the property and the prevailing interest rate. The advantage is you get to stay in your house and still earn a living out of it. The cash that you get can be used to supplement your monthly income.

Put simply, this scheme is the reverse of a housing loan.

With a housing loan, you pay monthly instalments to own a house. In a reverse mortgage scheme, the finance company pays you instalments and takes possession of the house after your lifetime. The advantage being, you need not vacate the house even if your monthly receipts stop. You can continue to live, but the interest component will keep adding up till the loan is repaid. . Therefore, you still run the risk of not being adequately funded in your old age. Another advantage is that your spouse can continue to stay in the house if he or she outlives you. Thus, you are sure of a roof over your head.

After your lifetime, the lender may sell the house. The balance, if any, after deducting the loan amount and the interest thereon, will be paid to your legal heirs. If the value of the property depreciates, your loan amount will be restructured to reflect the lower value. You do run the risk of lower monthly receipts in case of a fall in property prices.

The technicalities

`Saksham' carries an interest rate of 12 per cent and is available only for people above 60. Therefore, if you take voluntary retirement, you may not be eligible for the scheme immediately.

At first glance, the numbers suggest that the product can only be used as an additional source of income and not the sole source, unless you have a palatial house.

For a Rs 20-lakh property, a 65-year-old would get Rs 4,100 per month for 10 years.

After adding up interest, the amount payable to the company would be around Rs 10 lakh at the end of the mortgage tenure.

There are other issues too, such as the tax treatment.

In the US it is treated as a loan and, hence, does not attract tax. Clarity is yet to emerge on this issue.

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