In the past, many have suffered in their old age, after retirement, as they had no savings except the house that they lived in. Reverse mortgage enables these unfortunate people to convert their house into a source of income.
Every one understand what mortgage or home loan is. You buy a house by paying a small percentage of the total cost and the rest is paid by the bank. You then repay the loan, together with the interest, in small and easy monthly instalments over the next 10-20 years.
Reverse mortgage, as the name suggests, is exactly the opposite. Under this scheme, it is the bank that pays you EMIs every month; so that you can take care of your (and your spouse's) day-to-day living. For this, the house owned by you is hypothecated to the bank. It is, however, important to note that
(a) you continue to remain the owner of the house and
(b) you/your spouse can continue staying in it for the entire lifetime.
This payout can happen either directly from the bank or the bank arranges an annuity through some insurance company.
The first key question that arises is till when do you get these EMIs.
The answer : If it is a bank EMI - max 20 years. If it is an annuity - till lifetime
(But remember, even if the payout stops after 20 years, you cannot be asked to vacate the house. You continue to occupy it till you/your spouse's lifetime.)
The second key question is how do you repay the bank.
The answer : You don't. You are not required to repay this money.
The third key question is if you don't have to repay, how is the bank going to recover its money plus the interest.
The answer : Through the house.
The fourth key question is so do I lose the house.
The answer : Not necessarily. Your legal heirs get the first choice to repay the bank's loan + accumulated interest and take possession of the house. Only if they don't, does the bank sells the house to recover its dues.
The fifth key question is how much tax do I have to pay.
The answer : NIL. The EMIs and/or the annuity that you receive are totally tax-free. Further, since there is no sale involved (until the end if the bank sells the property to recover the loan) there is no capital gains tax too.
This broadly is what the Reverse Mortgage Scheme is all about. In the next blog, I discuss the operational parameters.
