In India, people expect their children to take care of their needs when they retire. And hence a lot of people do not plan their retirement and find themselves with little financial backing when they retire.

Today, nuclear families have replaced the joint family system. Children settle abroad or away from home and even the elderly do not want to be dependent on their children anymore.

The average life expectancy has risen to 80 years, while inflation is hovering around the 5 per cent mark increasing the cost of living. Even the pension the elderly receive might not be sufficient for their needs. With the rate of return on investments declining, the elderly cannot take much risk in their investments. In this dreary scenario, 'reverse mortgage' has come as a bliss.

Family responsibilities such as children's higher education and their marriage mean money saved for retirement is spent. This is where reverse mortgage helps them.

As the name suggests, it is the reverse of the forward mortgage, i.e. the income stream is reversed. In the case of forward mortgage, while taking a housing loan, people mortgage their house and pay EMI. Once they have paid off all the EMIs, the house is free from mortgage. In this case the lender, the housing finance company, gives loan to the borrower and the borrower pays it in EMI.

In the case of reverse mortgage, the borrower mortgages the house with the housing finance company and receives either monthly or periodic payment from the housing finance company. So in this case the lender pays the borrower either monthly or periodically or a line of credit a certain amount.

Even a lumpsum amount is provided for certain needs like house renovation and upgradation. In line of credit, the borrower has to pay the commitment fee. Let us see how reverse mortgage works. Suppose you are 62 and own a house, which is valued at Rs 1 crore (Rs 10 million). As per the guidelines, you would be eligible for a 15 year loan.

If you are eligible for 45% loan of the assessed value, then you would receive a loan of Rs 45 lakh (Rs 4.5 million) through reverse mortgage. And if the interest is 8 per cent per annum, you would receive Rs 1.2 lakh (Rs 120,000) annually (Rs 10,000 monthly) for 15 years.

In 15 years, you would have borrowed Rs 18 lakh (Rs 1.8 million) and the interest accumulated on this amount is Rs 27 lakh (Rs 2.7 million). So, you will have to pay Rs 45 lakh to settle the account. Suppose, at the end of the term, the value of the house has appreciated to Rs 1.45 crore (Rs 14.5 million), then the loan account is settled from this amount and the balance Rs 1 crore is paid to your heirs.

Eligibility:

You should be aged above 62 years.

The house should be owned by you either solely or jointly and has to be used primarily used for residence purpose.

There should not be any loan on the said property or if at all any balance is remaining it should be minimum.

How to get it?

You can approach the housing finance companies for the reverse mortgage. The loan amount depends on the value of the house and the borrower's age. After you apply for reverse mortgage, the firm get its value assessed and then decides the loan amount.

The National Housing Bank (NHB) has decided that the loan should be 45-60 per cent of the value of the house. The more old you are, the more chances are of getting higher loan amount. So a person aged 80 years is eligible for more loan amount than a 65-year-old.

The maximum term of the loan is 15 years. You can receive monthly EMI or periodic payments or line of credit. Usually the interest rate on reverse mortgage is a bit higher than that of regular mortgage. Cost involved in this is almost similar to that of the mortgage, in addition to inspection charges and appraisal fee.

This concept started in the US in 1980. Home Equity Conversion Mortgage (HECM) is one of the leading reverse mortgage provider in the US. There are five modes of payment in the US.

Under the tenure mode, monthly payments are made till the death of both the borrowers. Under the term mode, monthly payments are made for fixed term. Under line-of-credit periodic payments can be made as per borrower's request till his credit gets exhausted. In other two modes he can take combination of either tenure and line-of-credit or fixed term and line-of-credit.

How the loan gets settled?

After the death of the borrowers, the housing finance company sells the house and settles the loan account from that amount and pays the balance amount to the heirs. Or if heirs settle the loan amount then the house becomes mortgage free.

Even the borrower can settle the loan amount and get the house freed from mortgage. Suppose if the borrower has opted for the reverse mortgage and in between he hits a jackpot, then he can pay off the loan amount alongwith the interest accumulated and free his property. Further if in future, again he needs money, he can again opt for reverse mortgage.

As normally the house is jointly owned by the couple, they both are made party to the reverse mortgage. In case the borrowers outlives the loan period, then the payment stops, but they are not required to vacate the house. They can stay in the house till both of them die. But the interest gets accumulated on the loan till the accounts are finally settled.

The concept of reverse mortgage will soon become a reality and will be helpful especially for those folks who have not planned their retirement and have no other asset other than the house.

Secure Future

It is the reverse of the forward mortgage i.e. the borrower mortgages the house with the housing finance company and receives either monthly or periodic payment from the housing finance company.

Even a lump sum amount is provided for certain needs such as house renovation and upgrade. In line of credit, the borrower has to pay the commitment fee.