Can Reverse Mortgages Provide Steady Income For Retirees? Here’s What To Know

Investment banker and author Sarthak Ahuja recently explained on LinkedIn how reverse mortgage can provide income for senior citizens. He wrote, “There is one way to get monthly pension of almost Rs 1.50 lakh every month after the age of 60 even if you have no pensionable job, and only one house that you live in.” A reverse mortgage allows homeowners to receive a regular sum of money from a bank or financial institution by using their home as a collateral.

What Is A Reverse Mortgage

A reverse mortgage is a financial product for elderly citizens, typically above 60 years of age, where the owner of the house gets monthly payments rather than paying off the bank. The property acts as collateral for the loan, and the bank maintains a claim on part of the property. The owner of the house remains in the property and is not required to sell the property. The payments are generally tax-exempt, and the product thus becomes a means of stable income.

How It Works

According to Ahuja, a 60-year-old homeowner with a property valued at Rs 4 crore could receive monthly payments of about Rs 1.50 lakh for a period of 20 years. In exchange, the bank will hold a share of the property, often around 40 per cent. The payments may be used to pay for daily expenses, medical expenditure, or any other requirement during retirement.

Legal Protections for Homeowners

Ahuja added, “The bank can under law not evict you till the time you or your spouse are living in the house, no matter how long you live.” This means the homeowner and spouse can remain in the house without the risk of eviction, even as the bank holds a claim on part of the property.

Post-Demise Procedures

Once the homeowner dies, heirs have the choice to repay the loan balance and keep the property, or sell the home, pay the bank's debt, and retain anything left over. This option provides heirs with the freedom to make decisions on what to do with the property after making sure the bank’s lien is paid off.

Who Can Use Reverse Mortgages

Reverse mortgages are intended for homeowners who are “house rich but cash poor,” according to Ahuja. This refers to senior citizens who own high-value property, but do not have sufficient liquid savings or pension income to cover living expenses. This enables them to access the equity in their home as a source of income without the need to relocate or sell the property.

The amount paid per month in a reverse mortgage differs depending on several factors, including the value of the home, age of the homeowner, and proportion of ownership the bank will have.

Payments made every month typically continue for as long as the homeowner or spouse lives in the house. The total amount paid over time can vary depending on the value of the house and other terms specified in the reverse mortgage agreement.

Regulatory Context

Reverse mortgages are legislated to safeguard homeowners. Banks do not have the right to evict residents during their lifetime. Payments are typically exempt from income tax. The bank’s interest in the property is registered legally, and payment or settlement is made either by sale or transfer of property.

Reverse mortgages allow older homeowners to convert some of the equity in their home into regular monthly payments. The homeowner possess the home, legal protections against eviction, and heirs retain the option of repayment or settlement of the home upon the homeowner’s death.