The house in which you stay should ideally be kept for next generation. However, in case you have second home or another property, that real estate can be used to provide extra income during your retirement days.
Rental income from real estate property held provide a source of income that is adjusted for inflation. The income also has the advantages of being periodic and known in advance to plan and use. Rental yield earned depends upon the price at which the property was purchased. If the property that was purchased at a lower price earlier on is now generating good rental income, it adds to the financial security of the individual. Real estate provides appreciation in value as well as income. However, in the distribution stage of retirement, its ability to generate good rental yields is what is important.
The drawback of real estate comes from the low liquidity that it has. If there is an emergency and funds are required immediately, it will be difficult to liquidate the investment fast, though it is possible to get a loan against the property. Real estate can be one more asset class for generating income in retirement provided the investor has adequate investments in financial assets that are liquid and provide regular income.
The self-occupied home can also become a source of income in the extreme situation of the retirement corpus being inadequate to fund a comfortable retirement. The reverse mortgage scheme is offered by housing finance companies and banks. The important features of Reverse Mortgage are summarized below:
1. In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Instalments (EMIs). In reverse mortgage, 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.
2. Eligibility Criteria
- Indian citizen of 60 years or more,
- Married couples will be eligible as joint borrowers for joint assistance. In such cases, the age criteria for the couple would be at the discretion of the RML lender, subject to at least one of them being above 60 years of age and the other not below 55 years of age.
- Should be the owner of a residential property (house or flat) located in India, with clear title indicating the prospective borrower’s ownership of the property.
- The residential property should be free from any encumbrances.
- The residual life of the property should be at least 20 years. There is no minimum period of ownership of property required.
- The prospective borrower(s) should use that residential property as permanent primary residence.
3. The amount of loan available under RML depends on the age of the borrower, appraised value of the house and the prevalent interest rates of the lending institution.
4. A reverse mortgage loan cannot be availed against commercial property.
5. The maximum monthly payments under RML have been capped at Rs.50,000. The maximum lump sum payment shall be restricted to 50% of the total eligible amount of loan subject to a cap of Rs. 15 lakhs, to be used for medical treatment for self, spouse and dependants, if any. The balance loan amount would be eligible for periodic payments.
6. All receipts under RML shall be exempt from income tax under Section 10(43) of the Income-tax Act, 1961.
7. The rate of interest and the nature of interest (fixed or floating) will be decided by the lender.
8. The maximum tenure of an RML will be 20 years.
9. An RML will become due and payable only when the last surviving borrower dies or permanently moves out of the house. An RML will be settled by proceeds obtained from sale of the house property mortgaged. After the final settlement, the remaining amount (if any) will be given to the borrower or his/her heirs/beneficiary. However, the borrower or his/her heirs may repay the loan from other resources without bringing the property to sale.
10. The borrower will remain the owner of the house property and need not service the loan during his/her lifetime as long as the property is used as primary residence. Periodic payments under RML will cease after the conclusion of the loan tenure. Interest will accrue until repayment.
11. The Reverse Mortgage loan can be prepaid at any time during the currency of the loan. On clearance of all the dues, all the title deeds will be returned by the lender.
12. The borrower can opt for the frequency of EMI pay out (a monthly, quarterly, annual or lump sum payments) at any point, as per his discretion.
First you create a house in which you live, atleast for couple of years. Then you may aspire to move into a bigger house. In case your financial situation is quite comfortable, you may create an additional real estate property, which can be used to provide rental income during your retirement days. In case you just have one property in which you stay, the possibility of having rental income is very low. Only in extreme financial constraint situation you should evaluate Reverse Mortgage option.