Reverse Mortgage

What is it?A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan.
How does it work?You pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.

After the Tenure period ?If the tenure is for 15 years and the owner of the house and his/her spouse continue to live in the house till their death ,which can occur later than the tenure of the reverse mortgage.

Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house.

What are the features of this loan?The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India have the following features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60 per cent of the value of the residential property.
• The maximum period of property mortgage is 15 years with a bank
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken by the bank once in every 5 years.
• The amount received through reverse mortgage is considered as loan and not income,hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

How is the loan paid?With a reverse home mortgage, no payments are made during the life of the borrowers. Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.

In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.

The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.
What happens after the death of one or both of the spouses?If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options to settle the overall outstanding loan and retain the house, or the bank will sell the house, to use the proceeds to settle the outstanding loan and give the rest to the heirs.

How much of an annuity income can my house generate using reverse mortgage?
We can safely assume that it will not exceed the interest rates used for loan against property  which is currently in the region of 12 per cent to 14 per cent.

What is a loan to value ratio?Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent.

Does a person’s age affect the amount of annuity paid?Higher the age, higher the annuity. Everything else remains the same.

To buy or To Lease?

All growing small businesses may someday be faced with the question of leasing versus buying office space. This question has many pros and cons. With ever-changing office vacancy rates and stock markets, it is uncertain what the future may bring. A small business owner needs to carefully weigh the pros and cons of leasing or buying office space.

Pros of Office Space Buying

• Fixed Costs: Locking in your commercial mortgage long-term can give your business clear and fixed costs.
• Tax Deductions: The associated costs of owning and running a commercial space can provide expense deductions in the form of mortgage interest, property taxes and other items.
• Additional Income: Owning your office can offer the advantage of renting out extra office space adding another source of income.
• Retirement Fund: The prospect of owning commercial space and having the property appreciate over time, allows the owner to sell out and fund their retirement.

Cons of Office Space Buying

• Lack of Flexibility: A new or growing business may experience unexpected needs in the future. If your business continues growing, your owned office space may become inadequate forcing a sale of the property.
• Upfront Costs: Buying commercial space will initially cost far more upfront. There are property, appraisal and maintenance costs along with a large down payment and possible property improvement costs.

Pros of Office Space Leasing

• Prime Property: A leasing office space option provides a business with the chance to rent in an area with a good location and high image. If your small business is dependent on location and image, such as retail or restaurants, the leasing option is much more affordable.
• Free-up Working Capital: With your money not tied up in real estate your business can respond to opportunities in the market. In addition, your ability to borrow funds will not be as limited as with buying office space.
• More Time: Any type of ownership comes with headaches. A leasing option affords the time to focus solely on running your business.

Cons of Office Space Leasing

• Variable Costs: With a leasing option you may be subject to annual rent increases and higher costs at the time when your lease expires.
• No Equity: While leasing you will be funding someone else’s retirement with your lease payments. However, owning requires you to get involved in the property management business.

Effect of Hike in RBI Intrest Rates

• The interest rate hike by RBI will force the banks to increase the interest rates on project loans to builders & home loan rates to end customers.

• The immediate effect is home buyer’s hesitancy to buy and many buyers are expected to put off their purchases altogether till home prices come down and rates stabilize directly affecting the builder’s inventory.

• The cascading effect is the builder fraternity already reeling under increased  cost of building materials and lack of quality manpower would slash price to avoid stagnation in selling.

• This hike is however bad news for existing floating rate home loan consumers. Owing to the last 10bps rate hikes by RBI, EMIs for housing loan have risen 25% to Rs 980 per Rs 1 lakh of borrowing, and consequently loan eligibility for home buyers has declined by 20%.

• The situation is not likely to improve in the next few months as economists predict policy rate to be hiked by at least another 50 bps given the inflation and liquidity trends in the macro level.

• With every crisis comes a chance to gain something and the above situation is one such an event that will lead to chain reaction wherein no offer is too low for a builder hoping to reduce inventory.

• This is the best time to bargain buy the best of homes, since it is importance to remember a home buyer gets a loan for 20 years wherein five interest rate cycles will fall within that period. In every cycle the rates are likely to fall down or rise further. But at the end of the period, the gross payable amount will be averaged out for the consumer.

How do you lease a property in India ?

The rules, the details, the jargon, the legal work pertaining to leasing an income -generating real estate assets in India can appear daunting to the uninitiated. As a first step, every Landlord should answer the below questions before leasing a place.

• Was I fully aware  of the market conditions when I signed my lease?
• Did I make a wise choice of tenant in terms of profile and the assert class?
• What is the negotiation checklist used during negotiation and did I really get what I wanted in the lease negotiation?
• Have I made best use of the space I have leased or intend to lease in terms of probable development potential?
• Have I got a better deal as a Landlord in comparison to the nearby building of same specification or at the least have I saved myself from getting forced  on a lower rent than the market rate?

• Can I put my rental income to service a loan that I have taken ,if so what is the feasibility?

• What is the growth potential of the location where my building is situated?
• Are renewal terms and exit strategy without ambiguity and pitfalls?

Never Lease a place without having answers for all the above questions.

In Lease Info, we believe it is simply a case of access to refined actionable market intelligence that will empower to make well-informed real estate decision.

In real estate, what you don’t know can cost a fortune. Take Control.

To know more about our Practical Advisory Services see the next post.