Reverse mortgage is a great scheme for senior citizens. This involves mortgaging your properties in lieu of a monthly payment. The monthly payment can be used for meeting the expenses. Investors can also choose to get a lump sum amount subjected to some condition. This is a new scheme in India but has been very popular financial instruments in the west since many years. Reverse mortgage market is also much matured in west which enables senior citizens get sufficient cash flow to spend on their expenses when they cannot earn any more.

Criteria to avail the option

There are mainly two criteria –

1. The person should be at least 60 years old
2. The property must be owned and there should not be any loan against it.

Reverse mortgage is a good alternative for senior citizens who do not have any source of income in their old age. In today’s world when the families are living in isolation, where children more often work in faraway places, reverse mortgage can be a good source of hassle free income.

How does this work

People mortgage their properties to the bank and banks pay them a regular amount periodically. The period can be defined as monthly, quarterly, or even yearly depending on the structure of the mortgage. The bank agrees to pay regular sum for a specified period. Once the term is over, the bank will not pay any more but the resident can stay in the same house till death.

In the event of death of the resident, the banks will ask the inheritor to repay the sum spent on the resident. The inheritor can repay the bank and get the property back or ask the bank to take the property. Banks then sell the property in the open market and recover their money. If the property fetches more money, the bank will return the amount above the outstanding to the inheritor.

Calculation of Mortgage

Let’s look at how to calculate the mortgage that you are entitled to. Let’s assume the following data.

Typically the loan to value ratio is 60%.

Based on this data, here is how to calculate the monthly income that a person will receive.

Monthly cash flow = PV * LTV * (r/p) / (((1+r)^(N*p)) – 1) = Rs 14,476 per month.

This number will change as any of the parameter changes.

Important points to keep in mind

Valuation is important. Banks keep doing it at regular interval to assess the remaining value of the property. You should take active interest in what value they come up with and how.

The maximum amount taken will depend on individual banks. Few banks give 60% of the value while some may even go for 80% of the value.

Similarly banks can define their own tenure for loan. Few banks may provide monthly cash flow for 20 years while some can give just for 15 years. Check your bank.

There is also limit on age only after which you can go for it. Typically this age is 60 years and spouse’s age is 58 years. However, this may again vary with individual banks.

The settlement happens after the death of the last survivor.

There will not be any tax on the cash flow received (which is obvious but just thought I would mention this too.)

Finally, borrow only that which you need. Don’t take more than what you need. What might happen is that you borrow to your limit. Once 15-20 years are over, you find yourself still years to go but without any monthly income. Hence borrow what you need. In the future when the monthly income stops, you can use the existing properties which are not mortgaged.