Reverse Mortgage

Reverse mortgage is also known as �lifetime mortgage�. It is used to release the home equity in the property as one time payment or multiple installments. The owner's responsibility to pay back the loan is delayed until the owner dies or the home is sold, or the owner leaves e.g. leaves for some old age home. This term has been introduced in the Indian real state sector recently; however it has been quite popular in the foreign countries from a long time. The trend is also catching popularity in the country owing to the desire of securing future. In India, Dewan Housing Finance Corporation Limited, India's second-largest private housing finance company has launched a reverse mortgage scheme called 'Saksham' that is targeted at retired senior citizens above 60 years of age.

A Reverse mortgage is different from the conventional mortgage in the sense that in the conventional mortgage, the homeowner makes has to make a monthly amortized payment to the lender and after each payment his equity increases within his or her property, and typically after the end of the term say after a lease of 30 years, the mortgage has been paid in full and the property is released from the lender. However, in the reverse mortgage, the home owner makes no monthly payments and all interests are added to the lien on the property. Incase, the homeowner receives monthly payments, or a lump sum payment of the available equity percentage for their age, then the debt on the property increases each month.

In terms of financial jargon the definition of reverse mortgage can be defined as "an agreement by which a home owner borrows against the equity in his home and receives regular tax free payments from the lender.'' Here equity is the value of the property over and above any mortgage or other liabilities relating to it. Thus reverse mortgage is a contract between a homeowner and a financier which enables the homeowner to receive a stream of income, especially in retirement, from the future realizable value of the home. One interesting aspect of the Reverse mortgage is that if incase, a property has increased in value after a reverse mortgage is taken out, it is even possible to acquire a second or third reverse mortgage over the increased equity in the home.

The genesis of reverse mortgage can be traced to developed countries where, due to higher standards of living, better access to health care and higher life expectancy, people above 65 years constitute a major chunk of the population. The ever-rising cost of pensions and health care for the old led insurance companies to introduce the reverse mortgage in the US, the UK and Australia. In reverse mortgage, the capital value of a home is converted into an annuity over the homeowner's lifetime. The annuity may be designed to rise, fall or stay steady over the lifetime. The period of such payments is not `a specified number of years,' but `the remaining life time of the owner (and his/her spouse) of the property.' Simply put, reverse mortgage is a life annuity.

Thus by investing in a house through a housing loan and repaying the loan during his working life time, one will not only have a roof over his head throughout his life time, but also secure a joint life pension, that keeps in step with inflation, after retirement. Seen in this perspective, reverse mortgage would motivate people to build or buy their homes and, thereby, save for their retirement voluntarily. Hence reverse mortgage results in a double-whammy: it spurs economic activity and provides economic security.