Reverse Mortgage: The Loan That Pays You

Having a portfolio of Real Estate and still having a cash crunch can sometimes be real tough to manage personal finance. It sometimes becomes more acute if you have retired with no substantial income poring in and you don’t have any dependent or rather you don’t want to depend on someone else. Keeping in view such requirement there is an excellent financial tool – Reverse Mortgage.  Reverse Mortgage is an arrangement where the owner pledges his property to a Bank who in return pays a regular stream of money to the owner for a stipulated time. The bank charges an interest on the cash-flow. When the loan falls due the owner or the beneficiary has to payback the loan amount or the property-pledged can be sold to recoup the loan.

There are some salient guidelines by RBI worth noting:

  • Any house owner who is over 60 years of age can avail the loan with 60% of the property Value
  • The minimum tenure is 10 years and maximum 15 years and can also go up to 20 Years
  • The stream of cash flow can be monthly, quarterly, annually or lump sum
  • The revaluation of property is done every 5 years and loan amount can be increased as per the value.
  • The cash flow received is a loan amount so does not attract tax.
  • The repayment can be done anytime during the tenure of loan with no penalty charges.

Keeping pace with the inflation at all fronts be it daily products, healthcare or living expenses for a retired individual is a difficult task unless there is a source of incremental income. Reverse mortgage can be an excellent investment product for them because they can fill the gap of inflation and higher expenses that was not provisioned properly.

A retired individual who has asset-bank finds himself in a soup to liquidate the illiquid-asset. The illiquidity could be for several micro and macro reasons. The owner also does not want to do a distress selling. So in order to pull out of such situation Reverse Mortgage could be a much needed solution. Moreover, in this arrangement the owner is not parting away with the ownership of the property and also the repayment option comes only after the death of the owner. If the owner outlives the tenure of the loan he can still live in the property without property being encroached upon by the Bank.

Reverse mortgage is also an excellent financial tool for those owners who want to live a quality life and whose pension or regular income is not sufficient. It helps to augment standard of living.

This is a guest post by Mr. Mitesh Agarwal, BBA & MBA (Finance). Currently working as Financial Analyst with a leading firm in Mumbai.

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