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For All Seasons

Chandralekha Mukerji | Print Edition: October 2012

If you do not have enough money for your post-retirement life, one option before you is mortgaging the house. However, the fact that this is frowned upon by most is perhaps the main reason why reverse-mortgage loans , or RMLs, have not picked up in India.

RMLs were introduced to give senior citizens an option to use their house to generate regular income . Under the scheme, any house-owner above the age of 60 years can mortgage his house provided he stays there.

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The process, too, is fairly simple. First, the bank or the housing finance company does the valuation of the property. Then, terms are set for the rate of interest and the period for which the house-owner wants the payouts.

One can opt for monthly, quarterly, annual or lump-sum payments. The periodicity can be changed any time.

The lender recovers the loan and interest by selling the house after the death of the borrower or earlier if the borrower leaves the mortgaged property permanently. The excess amount is remitted to the borrower or his or her legal heirs.

"The amount is considered a loan and not income and hence is not taxed. Moreover, while renting out the property can fetch 2-3 per cent annually, reverse mortgage can yield more than 10 per cent a year," says Sumit Vaid, founder, Ffreedom Financial Services.

So, reverse mortgage generates more money than rent and is tax-efficient.

The payments received by mortgaging the house are considered a loan and not income and hence are not taxed.

However, as mentioned in the beginning, the product has not picked up. There are many reasons for this. "In India, there is a strong emotional attachment to the house, and parents want to pass it on their children. Mortgaging the house is an uncomfortable idea," says Vaid.

Apart from this, there are some problems with the fundamentals of the product. First, you will not get the full amount but 60-70 per cent value of the property. "The monthly payment is capped at Rs 50,000 in many cases. Many lenders even cap the loan amount at Rs 1 crore," says Sunil Mishra, chief executive officer, Karvy.

Moreover, the lender values the property once every five years. If it finds that the value has fallen below the outstanding loan amount, it will in all probability stop the payments. Also, the rates can be fixed or floating. Depending on the borrower's choice, the interest will vary according to market conditions. Since payments depend on the prevailing interest rates, they may be affected by the ever-changing interest rate cycle.

The property mortgage period is restricted to a maximum 20 years. So, if you decide to take the mortgage early, say, at 60, you stand a chance of outliving the loan tenure. Many are put off by this thought.

Restrictions on how the money can be used are also an issue. "The loan amount can only be used on the house which is mortgaged or for personal expenses. The borrower is not allowed to reinvest the money or use it for business purposes," says Mishra.

After the death of the last surviving spouse, the lender recovers the loan by selling the property. The legal heirs are given the first option to settle the loan and take the house. However, some experts say the process of freeing the property can be complicated. Establishing inheritance itself can be time-consuming and complex.

RML can be a great way to supplement pension in case you do not have sufficient funds. However, this shouldn't be the first choice. If you have a corpus, try to utilise it in the best manner possible.

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