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How reverse mortgage works


Senior Citizens Find That New Ulm, Minnesota, ...

Real estate investments are known for their il liquid nature- one of their biggest drawbacks. So, while owning a house is a basic need, this basic need takes up a huge chunk of one’s lifetime savings. Consider a scenario where during your retirement years, your house is your only big asset- built during your working years by saving regularly, taking a loan, cutting costs and later repaying it in instalments. Now, you do not have a regular income, and the constantly rising cost of living is making it difficult to survive on the meager pension. So, it there a way your biggest asset- your house can be of help?

Yes. There is. Thanks to the concept of reverse mortgage.

What is reverse mortgage?

Reverse mortgage is a way of unlocking the value of the so called illiquid asset- your house. It helps senior citizens pledge their property and earn a fixed regular income from it over their lifetime. The best part is, they can continue staying in the house till they live!

How does it exactly work?

Any person above 60 years of age and owning a house is eligible for reverse mortgage. The working of a reverse mortgage is exactly the opposite of the normal mortgage. Here, the property owner pledges/surrenders the title deeds of his property to the bank or the relevant financial institution. In return, the bank pays out a regular sum monthly for a fixed tenure, or as long as the owner is alive. On the death of the owner, the property is transferred to the bank.

What happens if –

The home owners outlive the tenure– The monthly payments to them stop at the end of the specified tenure. The property is transferred to the bank on their demise.

If the owners die prematurely– the bank has the right to sell the property, take its due and give the rest to the legal heirs. Alternately, they can give the option to the legal heir to pay them the outstanding amount and retain the house.

If one of the spouses die– the other one can continue to stay in the house till he or she lives.

If the owner wishes to terminate the agreement– There is an option to prepay the due amount along with a prepayment penalty and terminate the reverse mortgage agreement by the owner anytime during the tenure.

Tax treatment of the amount received– The amount received monthly by the owner is not taxable- either as income or capital gains.

Hence, reverse mortgage provides senior citizens a convenient way of being financially independent and generating an income for themselves till they live. But in spite of this reverse mortgage is not as popular in India as it is abroad, mainly because parents still want to pass on their hard earned assets to their children or heirs once they pass on.

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2 responses

  1. Dr M.Chandrashekhar MD | Reply

    Good article. Even if parents want to go in for reverse mortgage, there is an overt or subtle resistance from their sons/daughters in law. This puts a break as fear of antagonising their kids works on the parents.

    It is a mind game being played by their children.

  2. This is an eye opener for retirees. ramanathan dwarakanathan

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