Selling a house is better than reverse mortgage

My father is 64 and my mother 56. I have a brother who is employed .

A major portion of my father's VRS amount was spent on our education and other purposes.

The rest was invested in insurance and he receives a monthly income of Rs 500.

After ten years, he will receive a sum of Rs 67,000. We have a property in Ernakulam whose market value is Rs 1 crore. The house was inherited from my mother's father through a will in the year 1994, for which the then market value of Rs 3 lakh was paid and my mother became the legal owner upon the demise of her father in 2000.

My father plans to sell the house and invest Rs 35 lakh in a flat for them to reside.

He wants to give Rs 20 lakh each to me and my brother. The balance Rs 25 lakh is proposed to be spent on medical bills and treatment.

His monthly pension is Rs 10,000 and receives insurance agency commission of Rs 3,000.

He meets his monthly expenditure with these. Currently, neither my brother nor I are in a position to buy the house from my parents.

My concern is : Will it be a wise option to sell the property and book a small flat for them? Should my parents opt for reverse mortgage? Will Rs 25 lakh be sufficient for my parents for the rest of their lives?

— R Nair

Going by the financial strength of your father, selling the house appears an ideal choice rather than opting for reverse mortgage.

Consider this: your father wants to retain Rs 25 lakh for future needs. For a loan of Rs 25 lakh, at 10 per cent interest and for a tenure of 15 years, your EMI will be Rs 27,635.You total interest outgo would be Rs 24.74 lakh.

Alternatively if your mother sells the property and invests Rs 35 lakh in a flat, she will have to pay capital gains of Rs 11 lakh .

If both your brother and you wish to buy the house in the next two years, you can share it. When buying the property, include your mother as a joint holder.

By adopting such a strategy your mother can save the capital gains. As part of estate planning, she can write a will in your favour .

If both of you share and pay Rs 25 lakh to your mother as a gift from your initial contribution for buying the house, her needs will be fulfilled.

Till you identify the house, let your mother invest the sale proceeds in a capital gain scheme in any nationalised bank and the interest income can be saved for any medical emergency.

If you are not buying the property within two years, she can close the account and distribute the shares.

By doing this, you will still make money, because your mother does not have any taxable income.

Regarding your second query, Rs 25 lakh is sufficient if there is no major medical needs.

By depositing all the sale proceeds in a bank FD, she will earn Rs 10 lakh that can support emergency needs.

I am 52 and working. My dependents are my spouse, 48 and daughter, 18.After meeting all my expenses, including investments, I have a monthly surplus of Rs 5000.

I purchased a plot long back and constructed the ground floor with a loan that will be repaid by 2015.

I plan to construct the first floor as well with two portions for rentals to the tune of Rs 14,000. For construction, I need a loan of Rs 18 lakh . I wish to know if it is a good retirement (2020) investment . I have no pension schemes. I have already saved for my daughter's marriage.

— Murali

Constructing and renting first floor for retirement income appears to be a sound option. Let us consider two different scenarios.

For constructing, if you borrow Rs 18 lakh, your EMI is would be Rs 27, 552 for 96 months, at an interest of 10.25 per cent. Your total interest outgo would be Rs 8.45 lakh.

If your rental income grows at five per cent every year, at 70 it will be Rs 32,000 and at 80 it will be Rs 52250.

Besides that, your rental income will be eligible for standard deduction of 30 per cent and will reduce your tax outgo.

If you spend Rs 21 lakh for constructing the house, your return on investment will be 8 per cent. Besides you can enjoy the tax benefit for the entire interest paid which will enhance your overall returns.

Alternatively, if you consider investing the EMI and earn a return of 10 per cent, at 60 your corpus will be Rs 40 lakh.

Assuming that you save interest out go of Rs 8.45 lakh, your corpus at retirement will be Rs 48.5 lakh. If you deploy the corpus at post-tax return of 7 per cent, your annual income will be Rs 28,330.

Going by this it appears constructing the house will be a better bet even if the house remains vacant at times.

COMMENT NOW