Senior citizens' dilemma: To sell or reverse mortgage your house

If you are retired or nearing retirement, and for some reason haven’t been able to save enough for your retirement, there are a few options you have to choose from. You could either sell your house, buy a cheaper house and use the remaining funds as a retirement corpus. Or, you could take a reverse mortgage on your house. But, which option works out better?

According to a report published in Business Standard today, you should sell your house instead of choosing to reverse mortgage it because as a financial product reverse mortgage has issues. For instance, it is available only for 20 years. Which means, if you reverse mortgage the house at 60, your payments from the house could continue only until you are 80 years of age. What happens after that? No, the bank won’t throw you out of the house, just won’t make any payments to you.

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Also, not that you will get a huge amount, the loan to value ratio is 60 percent, which means for a 50 lakh house you would be able to get Rs 30 lakh, would that be enough for the rest of your life? For senior citizens who live in places where the property market isn’t really booming, the property price would be really low, and 60 percent of that would make the final reverse mortgage figure even lower. Also, when you and your spouse go up there, the banks give legal heirs an option to pay back the dues you owe to the bank and retain the house. Or the banks could sell the house, recover their dues and give the balance amounts to the heirs.

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But instead of reverse mortgaging, if you sold the house and invested the corpus, you would not only still have a house of your own, though different house, you could also have enough corpus. Like gold, Indian’s are attached to their house, so deciding to see your house would be an emotional battle which you would have to fight with yourself. The decision would be tougher that you would have possibly thought.

“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 Business Standard report quotes financial palnner Suresh Sadagopan as saying.

Of course, change isn’t easy especially for seniors. So, if you do plan to sell your house and move to a different location, you will have to look for new friends, new doctor and many new utility hands. Alternately, after selling the house, you could rent a place in the same locality as your old house. So, though the house would be different, all other things (friends, doctor, grocer and like) would remain and this means partial change, which would be easier to cope up with. Read whole Business Standard story here.

Firstpost take : We partially agree with this advice. If you want to sell your house and rent something in the same locality and survive on the corpus, it would work for you. But remember, staying on rent is not stable at all as you might have to get new accommodation each time the lease agreement ends. If you are not hesitant to change, buying a cheaper house in a different location might work too. As far as reverse mortgage goes, the Business Standard report mentions only one type of reverse mortgage product. There are two types, one where, the owner borrows against the equity in his house and gets regular monthly payments from the bank usually for 20 years. If you outlive the tenure, you are not asked to move out of the house, but your payments stop. Another type of reverse mortgage is Reverse Mortgage Loan Annuity (RMLA). Here, the bank passes on the value of the house to the insurance company by paying premiums. The insurer, in turn, makes regular payments to the you via the bank. This annuity-based product further has two options.

Option 1: Gives you annuity till you die. You get more money under this compared with the other option, and would work best for those who don’t have an heir.

Option 2: After your death, if your heirs want to get back the property, they will have to repay only the interest. You get lower annuity, but your heirs need to pay less to recover the house.