There is a wide range of options if you are looking for sources of income post-retirement. We tell you about one. It’s called a reverse mortgage.
The costs of living are only steadily rising and having sufficient funds salted away for retirement is very important. Another point to note is that medical costs are going up every year making adequate Health Insurance a necessity. A good health plan will take the strain off your retirement savings.
If you are looking for post-retirement investment options that can give steady income, there is a wide range of options. However, here we will talk about one. It’s called reverse mortgage. Let us tell you how this can help you during your retirement.
With life expectancy in India seeing a steady improvement, many people are living beyond their 70s and 80s. These senior citizens are becoming less dependent on their children and are choosing to live independently. But not having your children around for financial support can be a risk.
In this scenario, a reverse mortgage is popular among retired senior citizens.
What is reverse mortgage?
A reverse mortgage is simply the opposite of the traditional Home Loan.
How does reverse mortgage work?
A reverse mortgage is where senior citizens can get a regular source of income by mortgaging their house to a lender.
Wait. Giving the house on mortgage to a lender doesn’t mean you are left out in the cold. No. Senior citizens opting for a reverse mortgage will continue residing in the house for the duration of their lifetime. What’s more? They will get regular payments for the period based on the value of the house that is mortgaged.
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How exactly does it work?
The financial institutions offering you reverse mortgage will first make a valuation of the house based on various factors such as the demand for the property, its condition and prevailing property prices.
Once the property is mortgaged and the requisite checks have been done, the institution approves and disburses the amount in the form of regular payments over a specific fixed term. This is done after considering any price fluctuations and interest charges.
Regular payments? How often?
The amount can be paid to you on a monthly, quarterly or an annual basis. The amount can also be given as a lump sum.
Wait. The Reserve Bank of India has some guidelines
The Reserve Bank of India has laid out some guidelines for a reverse mortgage.
The amount sanctioned can be up to 60% of the value of the property.
The tenure can range between 10-15 years. A few banks even offer a reverse mortgage for a term of 20 years.
The financial institution should make a revaluation of the property once every five years. In case the property value has increased, the borrower has the option to increase the loan amount.
The increment in the loan amount is paid out as a lump sum to the borrower.
Additional Reading: Retirement Planning For Everyone
Benefits of reverse mortgage
The amount received using a reverse mortgage is not considered as income, rather it is treated as a loan. This makes the amount tax-free. However, you may be required to pay Capital Gains Tax when the property is sold.
Eligibility criteria for reverse mortgage
The applicant for a reverse mortgage should have attained the age of 60 years.
In case the applicant’s spouse is a co-borrower they must be at least 58 years old.
The house or flat should have been acquired by the applicant and must be self-occupied. The location of the property should also be somewhere in India. The property must be free of any encumbrances.
The minimum life value of the property being mortgaged must be at least 20 years.
The property must be the primary residence of the applicant(s).
Nowhere near retirement? Then, you could look at buying a house. This might be the right time as interest rates are heading north. And there are some great Home Loan offers right here!