Senior citizens who have not saved enough for their retirement and don’t have regular cash inflows could face a financial squeeze in their golden years. But of help can be the house you own and live in. You can sell it, buy a cheaper house in a distant place and invest the balance for regular cash flows.

But if you are averse to shifting out of the area you live in, or are not comfortable moving into a smaller house, you have two options. You can take a reverse mortgage loan on the house, or sell it and move into a rented accommodation in the same vicinity. Both choices have their pros and cons.

Reverse Mortgage

With a reverse mortgage loan, you get regular income even while living in the same house. Factors such as the value of the property , the loan-to-value ratio, and your age determine the loan amount. Based on this, you get monthly cash inflows. The bank recovers the loan (from sale of the house) along with interest after you and your spouse pass away or move out. The excess, if any, is returned to legal heirs. Your legal heirs can choose to pay the loan dues and get back the property. It is better to opt for the reverse mortgage loan-enabled annuity scheme than the normal reverse mortgage loan scheme.

The annuity scheme, run by banks in tie-ups with insurance companies, can fetch you higher monthly inflows. Say you are aged 60 and take a reverse mortgage loan of ₹30 lakh (at 60 per cent loan-to-value on a house valued at ₹50 lakh).

The monthly payment under the annuity scheme, for example, can be up to ₹19,500 per month (Star Union Dai-ichi Life Insurance-Central Bank of India). In contrast, the normal reverse mortgage loans offered by banks will get you less than ₹3,000 a month.

Besides, annuity schemes give you cash flows as long as you live, unlike the 20-year cap in normal reverse mortgages.

Also, since October last year, payments from the annuity schemes are exempt from tax. Your house will be periodically revalued; this could make you eligible for higher monthly inflows. But reverse mortgage has its drawbacks.

You cannot bequeath the house. The loan dues could add up to a significant sum, especially in the annuity scheme; your legal heirs may not be able to pay this. You will have to bear ongoing expenditure such as insurance charges, taxes, maintenance and statutory payments toward the house.

Besides, there are restrictions regarding the use and maintenance of the house. You cannot rent it out. The loan can be foreclosed and the monthly payments stopped under situations such as bankruptcy, and non-payment of taxes and other dues. A similar provision restricts you from adding a new owner to the title. Finally, with rising prices, there is a risk that the monthly inflows may fall short of your requirement in the future.

Sell and rent

Selling the house and renting a similar accommodation in the same locality can also be worthwhile. The proceeds from the sale can be parked in safe debt instruments and the interest income used to pay the rent. Consider the above example where the house is valued at ₹50 lakh. On sale of the house, you may have to pay capital gains tax. If your net realisation is ₹45 lakh and you park this in fixed deposits, interest income after tax could be nearly ₹4 lakh a year or about ₹33,000 per month. Annual rentals are usually around 3-4 per cent of the house value. This means your annual rental outgo could be between ₹1.5-2 lakh a year, or between ₹12,500-16,500 a month. After paying the rent, you will still be left with ₹16,000-21,000 a month for other expenses.

Drawbacks

The problem with the sell-and-rent option is that your rental expense is likely to increase every year unless you are able to enter into longer agreements. Also, interest income from your investments will fall if rates decline.

These factors could force you to dip into the investments to meet rising costs. But this will reduce your regular interest income. So it is imperative to control other costs and keep an adequate buffer for contingencies in future years. There could also be the nuisance of having to shift houses if the landlord asks you to leave. Finally, even in the sell-and-rent option, you can not bequeath the house, though you could bequeath your remaining investments.

The better choice

From a financial point of view, selling and renting makes more sense, since it puts more money in your hands. On the other hand, a reverse mortgage loan will be more convenient operationally − you get to stay in your own house while monetising it.

comment COMMENT NOW