Own a house but need more retirement income? 7 things to know about reverse mortgage

New business data points to the fact that For many people, retirement creates an unusual financial situation. They may own a house worth a substantial amount but have limited money coming in every month.

Selling the house is one option, but what if you want to continue living there?

A reverse mortgage is designed for precisely this situation. Instead of you borrowing money and then paying an EMI to the bank, the lender gives you money against the value of your house. You keep own and live in the property, and there are no regular repayments while the conditions of the loan keep be met.

Here are seven things you should understand before considering one.

1. You must meet the eligibility conditions

Under the National Housing Bank's reverse mortgage framework, the borrower should be an Indian senior citizen aged 60 or above.

Married couples can apply jointly. At least one spouse must be above 60, while the other should generally be at least 55, subject to the lender's criteria.

The house or flat should be in India, have a clear title and be free from encumbrances. It should additionally be the borrower's permanent primary residence.

2. You don't have to sell your house

This is what makes a reverse mortgage different from simply selling your property to fund retirement.

You mortgage the house to the lender but keep own and live in it. You additionally don't have to make the usual monthly principal and interest repayments while you keep meet the terms of the loan.

So someone who is comfortable in their existing home does not necessarily have to move just to release some of its value.

3. You can receive money regularly

The lender can make payments monthly, quarterly, half-yearly or annually. Depending on the arrangement, money may additionally be available through a line of credit or, in specified circumstances, as a lump sum.

This can help a senior citizen supplement pension and other retirement income or meet expenses such as healthcare and home maintenance.

The amount available isn't based simply on what you think your house is worth. The lender considers factors including the property's assessed value, the borrower's age and prevailing interest rates.

4. The payments don't continue indefinitely

This is something borrowers should understand clearly.

Under NHB's operational guidelines, the maximum loan disbursement tenure is 20 years. That means the lender's periodic payments do not necessarily continue for the rest of your life.

That stated, reaching the end of the disbursement period does not by itself mean you have to leave your home. Subject to the loan conditions, the borrower can continue occupying the property.

If regular income is the main reason you are considering a reverse mortgage, ask the lender exactly how long payments will continue and what happens after they stop.

5. The money received is not treated like normal income

Payments received under an eligible reverse mortgage are loan proceeds rather than ordinary income.

NHB's guidelines state that payments under a reverse mortgage are exempt from income tax under Section 10(43). The reverse mortgage transaction itself is additionally given specific tax treatment under the Income Tax framework.

This is one reason a reverse mortgage should not be confused with earning rent from a property.

6. Your children can still keep the house

A common concern is that taking a reverse mortgage automatically means the family loses the property after the borrower dies.

That isn't necessarily what happens.

The loan generally becomes due when the last surviving borrower dies, sells the house or permanently moves out. The borrower or legal heirs get the first opportunity to repay the outstanding loan and accumulated interest and have the mortgage released.

If they want to keep the house, they can arrange to repay what is owed.

If the property is instead sold to settle the loan, the sale proceeds are used to clear the outstanding amount. Any surplus remaining after the loan and accumulated interest have been settled goes to the heirs or estate.

7. Understand what happens to your home equity

The money you receive isn't free. Interest keeps accumulating on the amount borrowed. Over time, as a result, the amount owed to the lender grows and the equity remaining in the property can decline.

NHB guidelines provide for a "no negative equity" or non-recourse guarantee, which means borrowers should not owe more than the net realisable value of the property, provided the terms of the loan have been met.

The property may additionally be revalued periodically, at least once every five years under the NHB framework, and the amount of future payments can be revised depending on that valuation.

A reverse mortgage will not suit every retired homeowner. If you already have enough pension and investment income, you may prefer to leave the house untouched. It may additionally be less attractive if preserving the full value of the property for your children is a major priority.

But for a senior citizen who owns a valuable home and is struggling with monthly cash flow, it offers another possibility: use some of the wealth locked inside the house without having to sell it and move out.