The life expectancy rate, especially in our country, has been rising in recent years and as a consequence the living and medical expenses too.
The life expectancy rate, especially in our country, has been rising in recent years and as a consequence the living and medical expenses too. Many aged who don’t have much savings or pensions are feeling crushed under the burden of creating a nest egg. This is where reverse mortgage concept comes in.
Let’s take an example of a senior citizen who has retired and living with his wife in an independent home for a long time. Assume that the couple has pension but not a satisfactory amount to meet their expenses. Reverse mortgage can be a good idea for them.
In simple terms, a reverse mortgage is the opposite of a typical housing loan. The scheme enables the aged to receive a regular stream of income from the lender against the mortgage of his/her home, and the borrower can reside in the property till the end of his life.
Reverse mortgages can be a fantastic retirement lifeline for the aged, as the days are gone when the elderly lived with their children and depended on them for their financial needs.
Once the home is pledged with the financial institution/lender, the monetary value of the same is calculated by the lender on the basis of the property’s market value, its demand and condition. Then the financial institution disburses the mortgage value to the borrower in the form of periodic payments, after accounting for the interest and price fluctuations of the property. When the borrower starts getting the amount from the bank periodically, the equity or the borrower’s interest in the property decreases. If during the tenure, the valuation of property increases, the borrower has the option to increase the quantum of the loan. Since it is a loan not an income, the amount generated from reverse mortgage is not liable for tax.
Though the reverse mortgage concept is popular in the west, it is yet to gain acceptability in our country and many are not even aware of it.
(The writer is Mr.Umesh Thottathil, Analyst-Fund Management with Moat Multi Family Office)
