Planning for reverse mortgage?

While taking a loan against an owned house, age and interest rate will be the deciding factors, writes Arnav Pandya.

The common perception among people is that one should use all the options available. This extends across areas and often people buy financial products and services when they actually do not need them. A person who is in the senior citizen's bracket should check whether he or she requires reverse mortgage. The most important thing to understand is the nature of reverse mortgage and how it can be used to tackle the prevailing situation.

Poor cash flow

There is a big difference between the net worth of a person and the amount of cash he gets on a regular basis. This is the case as a person gets older. People have amounts that are invested in various assets. But this might not generate the cash flow that is enough to meet the various requirements -- a common problem for cash flow.

Consider the case of a person who has made an investment of Rs 30 lakh in various assets that will provide for the retirement corpus. This can generate a return of say 8 per cent per annum, which will work out to Rs 2.4 lakh a year.

This means that there will be an ability to spend up to Rs 20,000 per month.

What usually happens is that in the earlier years this can be enough but if there is no consistent rise in the amount earned along with inflation, then this will lead to a shortfall resulting in a situation where there is a cash flow problem.

Assets don't matter

The other side of the situation is that a person might not be financially poor, especially on paper. There might be an asset in their name which is worth quite a bit. The best example of this is a house property worth over Rs 50-60 lakh. There is no problem as far as the assets are concerned. But this does not solve the overall problem of cash flow. This is a classic situation where there is a rich asset base but nothing can be done about it.

Reverse mortgage

This is the situation when reverse mortgage will come into the picture. What happens is that a person takes a loan against the house that he already owns. Two important factors that will determine the payout are the age and the interest rate.

The older a person is, the higher will be the amount per month that he can get.

It is also important to know that the age will often determine the percentage of the asset that will be given as a loan. The interest rate will depend on the rate that is charged by the bank.

This will be crucial as it once again determines the extent of the payout for the individual and each person would like to ensure that he gets a higher payout.

So, take a close look at your situation and only if you fall within the requirements, go for a reverse mortgage.

(The writer is a Certified Financial Planner)

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