Funding a life after retirement can be quite easy and a retiree can spend time in the comfort of their own home
Funding a life after retirement can be quite easy and a retiree can spend time in the comfort of their own home
What you save and invest throughout your lucrative life must also fund your post-retirement years, which stretch almost as long as the early ones today.
You need a bunch of investments to carry you through and one of the ways is to unlock the investments you have already made.
First, you could be drawing a pension from your employer, having a provident fund product, a national pension scheme or annuity policies. Of course, you could have a post-retirement job or a consulting income and your investments will pay off.
You would most definitely own your own home and this gives you another way to increase your income at this point.
A reverse mortgage is simply a loan on your home under specific circumstances. The basic requirement for this is that you must be over 60, that you must own and live in the house that you are going to mortgage. The bank will create a mortgage on the property and give you a loan against it. You can take it in a single payment or in monthly, quarterly, semi-annual or annual installments.
You can stay in the same house and you don’t have to leave the house. You don’t have to pay interest or even repay the capital. Upon your death, your named/legal heirs will receive what remains of the home’s value once the bank collects its principal and interest.
The reverse mortgage as a product has been available for over a decade and a half, but hasn’t caught up much. There are a few touted reasons. Indians like to bequeath their homes to their offspring, so this option hasn’t gone over well culturally – well, it changes in significant pockets.
The mortgage value is only part of the value of the property and the tenure is only a maximum of 20 years and what about the income after that and what about it of the payment of the loan?
Social trend
We are going through a social trend where a certain category of investors can see a welcome flexibility in this.
Let’s say your house is worth ₹1.5 crore. Banks will lend you a certain percentage of this value depending on a variety of factors including the market price and the perceived future appreciation of the property. Let’s say they offer you ₹1 crore. The interest rate is usually 1.5-2% higher than a typical home loan.
term of the loan
Another disadvantage is that the duration of the loans is at best 20 years. At this point you must repay the loan or allow the bank to recover your loan by selling the property.
If you die before the term of the loan, the outstanding will be the liabilities of your legal heirs, and the residual value of the property, their asset. Since you are not repaying the principal or paying interest, the dues to the bank at that time would have increased significantly.
Today, mortgage rates are 6-7% and a major bank offers reverse mortgages at just over 9%. Simple interest of 9% on ₹1 crore over 20 years would bring the total outstanding closer to ₹3 crore. If you apply compound interest, the outstanding amount would reach ₹3 crore by the 13th year and be almost ₹6 crore by the 20th year. (I calculated the interest as if the loan was given all at once and not over the 20-year period just for easy calculation.)
You need to adjust this for two factors. First, the market value of the property could have appreciated within 20 years and paying it back to the bank may still leave you with residual value. If a ₹1.5 crore property today will earn you ₹6 crore, then 20 years from now, that is an opinion you should take.
Sure, we’ve seen it happen, but property markets have also stagnated, with the pandemic being the most recent trigger.
The second is that the payments you receive are loans and are not taxable. Add in the non-financial benefits you get for staying in your home for your entire life even though the term of the loan is over and not paying rent because, well, it’s your property.
The reverse mortgage also provides this coverage until the death of your spouse.
Annuity option
A variation of this is the reverse mortgage linked to an annuity policy.
Annuities are periodic payments from a retirement policy taken out with a life insurance company. It is an insurance, a financial cover against the risk of living too long.
Annuity income, as you know, is taxable as income. However, there is a specific exception for annuities that are part of a reverse mortgage and have not been taxable since 2013. Thus, this puts the annuity option on par with the loan option in a reverse mortgage. .
In the annuity option, the lump sum loan, ₹1 crore in the example above, is given to the life insurance company to purchase an immediate annuity. Annuities have many options ranging from life annuities to fixed terms and the purchase price you pay varies accordingly.
This flexibility with the duration of the payments you will receive gives the annuity option a few extra points.
The limited amount of the reverse mortgage and the limited duration can be seen as negative points. But they can also be seen as positive. If you consider it as an option that unlocks the value of your property for the first 10-20 years of your retirement life, consolidating your assets thereafter, including selling real estate and moving to a retirement community , those two factors actually give you the flexibility for that. The high interest rate is also a negative, but if you plan to use that as a stopgap while waiting to liquidate other real estate at your own pace, it might work.
You could pay off the mortgage, liquidate your property and distribute the proceeds to your loved ones during your lifetime. Or let them pay the mortgage or work with the bank to liquidate the property and claim the residual value.
A recent WhatsApp conversation centered on a trend that a growing category of affluent, middle-class older people find their offspring, are very successful in their careers, and are geographically dispersed and mobile, neither wanting to inherit property in their homes nor worrying about to liquidate them. after the life of their parents. If you fall into this category of people, consider a reverse mortgage as a way to monetize your home. At the end of your life, you will even have the services of the financial institution that will sell the property, settle its debts and return the residual value to your nominee/legal heir!
(The author is a business journalist specializing in insurance and corporate history)
