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Personal Finance - Sell your house. Don't go for reverse mortgage

24-Jun-2013

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Why would anyone move out of a centrally-located place like Dadar in Mumbai and move to Kanjurmarg, a suburb? D V Damle and wife Madhuri did just that. By doing this, not only were they able to buy a bigger house without taking any loan, they could also put aside some money for future needs. Of course, they had to give up the convenience of being connected to every part of Mumbai.

However, in return, they got a bigger flat and a complex with amenities such as lifts, clubhouse, and swimming pool - facilities treasured more in old age. Selling the two units (each having two rooms) they owned in the chawl in Dadar and moving to a bigger flat in the same locality would not have been possible. At Kanjurmarg, they got a 600-sq ft flat, with money to spare. This was sufficient for them, as their two children are settled out of Mumbai. And, because they purchased the flat in 2005, the value has appreciated almost five times, adding to their wealth. "Getting to any place in Mumbai from the Dadar house was a breeze.

The bus depot was just outside our building. Travelling on both the central and western railway lines was very convenient. But there was severe noise pollution. Climbing the steps was difficult for us, as there was no lift. That is why we decided to move, even if it meant moving further away from town," says Madhuri Damle. (MORTGAGE PROPERTY) Couldn’t the Damles have considered taking a reverse mortgage against their existing house in Dadar? After all, the product is targeted at senior citizens like them and most public sector banks and some housing finance companies in India offer a reverse mortgage.

However, it has not really caught on. The cap on the loan amount and tenure has worked against the products. The maximum tenure allowed for reverse mortgage is 20 years. It means if you take the loan at the age of 60, you will get payment only till the age of 80. The maximum loan amount allowed is up to 60 per cent of property value. This means if your property is valued at Rs 1 crore, you would get only Rs 60 lakh. Given that average life expectancy has increased and living costs have gone up, this amount might not be enough for senior citizens, especially if they have no other source of income. That is the primary reason for the product not picking up.

Also, banks don’t usually give loans of more than Rs 1 crore, which could be a drawback in cities such as Mumbai and Delhi, where property prices are high. For senior citizens, in the absence of a monthly salary, availability of cash is important. Even if you have medical insurance, it will not pay for the several visits to the doctor or would prove insufficient in case of a big-ticket hospital treatment. Selling a house and investing the surplus money is a clean solution. However, most people are reluctant to sell, due to emotional attachment. That is why, though selling your house could make more commercial sense, not too many are ready to do it, says Suresh Sadagopan, a certified financial planner.

"From a purely financial point of view, I would suggest selling. For instance, if you own a house in Mumbai and are willing to settle in a Tier-II or Tier-III town or in your village, you will get a sufficient amount that can provide substantial savings. The standard of living, too, will be lower in a smaller town. But not too many people are willing to do it," says Sadagopan. The main concern in such cases could be relocating to another place and building a new friends’ circle. You might even need to look for new doctors, because good healthcare and medical treatment is important in old age. However, such issues are not insurmountable.

In fact, Sadagopan goes a step further and suggests selling your house and staying on rent is also a good idea. True, you might be forced to look for a new house every 11 months but that can be solved by going for longer-term rent contracts, for two or three years. "For a senior citizen, the shifting may be a nuisance. But a real estate broker and a packer can take care of it. So, why should you not try this option if it can make you cash-rich?" he asks. The biggest drawback of a reverse mortgage is that on the death of the owner and his/her spouse, the bank gives an option to the legal heirs - either settle the overall loan dues and retain the house or the bank will sell the house, use the proceeds to settle the loan and give the balance to the legal heirs. In many cases, the legal heirs might be unable to settle the loan dues and could lose the property.

According to Anil Rego, founder and head of investment advisory firm Right Horizons, financially, a reverse mortgage is the least preferable option compared to selling property and moving to a less expensive house. "Instead of going for reverse mortgage, in case you move to a less-expensive house, you can save more and keep the asset for your next generation. Let’s say you have a property worth Rs 1 crore. Assume you sell your property and buy new property, which is less expensive, say Rs 60 lakh, and invest the proceeds in an option which gives you regular monthly income.

If we compare it with a reverse mortgage, the investment value available to the legal heir will exceed the value of the reverse mortgage option," says Rego. Reverse mortgage would only be suitable for someone who does not have legal heirs. It is not a suitable option for someone who wants to take care of retirement expenses.

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