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Live well on the equity of your house

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Raman Menon retired a few years ago from a senior position in a private company. His children live abroad and are unlikely to return to India. As a salaried employee, Menon had spent most of his earnings in purchasing an apartment and educating his children. He now finds himself in fairly difficult straits as his income is not enough to enable him to live well. Rusi was a small businessman and due to ill-health he had to stop work. His wife Pervez and he have no children. They have an apartment in Bandra. Mounting medical bills have taken away most of their savings.
This is the plight of many couples. On retirement, after having educated and married off their children they end up, at the dusk of their lives, with very little savings and often have to scrimp in order to survive or depend on hand-outs from their children.
An alternative that these individuals can consider is a reverse mortgage which is now being offered by scheduled banks and housing finance companies. This can be used to supplement one's pension or used for day-to-day requirements.
A reverse mortgage is a home loan monthly cash payments based on the value of the home mortgaged. Homeowners defer payment of the loan until they die or move of the home.
Under this, a senior citizen (one above the age of 60) owning a self-occupied property can borrow up to 80% of the realisable value of the property. The amount can change periodically as the property has to be valued at such frequency and intervals as decided by the lender. This must be at least once every five years.
The amount borrowed will be paid to the senior citizen monthly/quarterly/ half-yearly or annually on a reverse annuity basis. This is similar to equated monthly installments (EMI) paid by individuals on loans that they take. These receipts are not considered as income under the Income Tax Act and therefore it is not taxable.
The maximum period of the loan is twenty years or till the death of the last surviving spouse whichever is earlier.
The loan can be used by the senior citizen for renovation of his property, medical expenses and the like. It cannot, however, be used for speculation, trading and business purposes.
The borrower must continue to reside in the premises and use it as his primary residence.
On the borrower's death or the borrower leaving the house property permanently, the loan is to be repaid with interest by the sale of the property. Any surplus received will be given to the heirs (if the property is sold on the death of the borrower). The legal heirs will be given the option, however, to repay the loan along with interest without the sale of the property.
The borrower can also repay the loan with accumulated interest and have the mortgage released without selling the property.
In addition, the borrower/borrower's heirs can also have the option of prepaying the loan at any time and have the mortgage released.
Reverse mortgage loan is clearly a facility that should be considered by persons who have no children or direct heirs, or whose children are independent and living elsewhere. The facility can ensure that in one's old age one lives well.

The writer is managing director of Cortlandt Rand and an author

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