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Why Reverse Mortgage



My dear readers, today I am discussing on a very interesting and a new concept in the Indian economy i.e. Reverse Mortgage. As a financial consultant, I faced many situations where my clients were very eagerly planning to build a house at least before their retirement or immediately after their retirement so that they can enjoy retired life in their own house. But, as the real estate prices are in boom and house construction materials are becoming costly, it is very difficult to construct a house. Every one between the age group of 30 to 55 or 60 always dream of owing a house at least at their retired age, but it is very difficult as they will have to procure funds for their retirement also. In today’s scenario, no one wants to depend on their children at their retired age.

Therefore, people think hundred times before constructing a house by using all their lifetime savings. If they do so, they will not be having any income to live.

Now, there are two options before them. One is either to construct house from their savings, other is to go for a pension scheme. At this scenario he can avail benefits of only one option. But, both are very important as they are very much related to his financial as well as emotional status.

The solution for realizing both is "The Concept of Reverse Mortgage".

Reverse Mortgage can be well defined as “a scheme under which a bank or financial institution permits the owner of a house to leverage the future value of the asset in to a steady source of income”. Reverse Mortgage allows elderly people to have a steady stream of income by mortgaging self occupied property to banks or eligible financial institutions while continuing to live in and hold the title of the house till he is alive or sells the house or moves out.

The Reverse Mortgage is aptly named because the payment stream is ‘reversed’. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. In case of a regular mortgage, the borrower mortgages his existing property and uses the amount to finance the property or for any other purpose and is required to repay the loan amount in the form of Equated Monthly installments (EMI). The EMI would include the loan amount and the accumulated interest. The property mortgaged serves as a collateral security for the loan borrowed. In case of a regular mortgage the property is redeemed by repaying the loan amount within the permitted tenure during the lifetime, whereas in case of reverse mortgages the property finances a given tenure of life and is used to redeem the debt after the demise of the title holder.

In India, Reverse Mortgage is a new concept and hardly few people are aware of this. Recently, Union Finance Minister P Chidambaram in his Budget speech mooted the concept of reverse mortgage for people aged more than 60 years. This concept is new to India but quite popular in developed countries helping senior citizens to generate some cash flow. As a financial planner I personally recommend one to go for this. Because, it gives the satisfaction of living in the own house, moreover it helps to procure funds for retired life.

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