Let your home earn you a Pension

“One of our acquaintances, Mrs. Parlekar, 64 stays alone in her Andheri home as her husband passed away two years back and both her sons are settled in  the U.S.A  Mrs. Parlekar is having savings of  around Rs. 1.5 crores which is kept in bank’s fixed deposits. She has  divided this amount in three parts of Rs. 50 lakhs each. Two of these accounts she have been kept aside for her two sons, and she is  utilizing the interest from her third account for her daily expenses on a monthly basis. She gets a monthly interest amount of around Rs. 35,000 post tax for her daily expenses that included medicines of around Rs. 10,000 12,000.,Fair enough till now.

Prima facie a good arrangement.,Till I received a phone call from her and this is when she mentioned that the society in which she stays has decided to go for redevelopment. In lieu of the flat, she is getting  Rs. 60 lakhs from the developer. The possession of her new flat is will come by in 4 years time.

So what does she have now?,Either should stay on rent or  purchase another flat. Mrs. Parlekar did not want to move out of the area as she was  quite comfortable in that area with all its amenities. But she scouted for few flats in her area only to find that these were in a range of a crore.,She didn’t like the idea of staying on the rent as but if she bought a flat for herself, she will have to break her FD of Rs. 50 lakhs and also use up the 60 lakhs given by the builder. Then she would have been left with just Rs. 10 lakhs and interest from the same wouldn’t have been enough to meet her daily expenses.

She even thought of breaking the FDs which she had kept aside for her sons for meeting her regular expenses.,She asked for my advice before taking this step.,I mentioned her reverse mortgage that is ideal for people like he where a senior citizen can mortgage his/her primary residence with a bank and receive the mortgage amount as periodic payments, be it monthly, quarterly, half-yearly, or yearly.

It is reverse of taking a,home loan,where we pay EMI to the bank and at the end of the tenure, the property will belong to the owner. In case of a reverse mortgage, the bank will pay EMI to the owner, and after the death of the owner and spouse either sell the property to recover the,loan,with interest of the heirs can pay the loan with interest and take the flat back.

This is a good product for retirees who are cash poor but asset rich. They can utilize their asset to provide them regular cash flows. Also in case of a reverse mortgage, there is an option to take the amount as a lump sum in place of regular cash flows. For those who want the reverse mortgage for taking care of their regular expenses, they can opt for the option of regular cash flow periodically. The biggest draw back here is that it is for the maximum tenure of  15 years, after which the bank will not take possession until either of the husband or wife is staying in the home but the cash flow will stop.

Thus in case the couple outlives the term of 15 years, they will have think of some other means of generating income to support themselves.,So how to generate income if you outlive the tenure? The better option is to take a lump sum against the home and invest the money in such a way that it will give return for the entire life and not only for a fixed term. This in turn will take away the issue of getting money from the bank for a fixed tenure.,One can buy an annuity for life, where one doesn’t have to worry about living long.

This annuity of life has two options, first you can buy a plan where the capital is returned after the death of the buyer of the annuity or where the capital is not returned after death. In case the capital is paid back, the annuity amount will come down significantly. So one should be very careful while choosing the option of with return of purchase price or without return of purchase price.,For a flat of around a crore the lump sum amount will be around Rs. 20 lakhs. Along with that the left amount of Rs. 10 lakhs from the FDs make a total of Rs. 30 lakhs to purchase an annuity.,Below is an illustration for a few companies where an annuity is bought of Rs. 30 lakhs for a person aged 60 years of age.,Sr. No.   Details ICICI Pru Bajaj Allianz LIC,Purchase Price 30,00,000, With return of purchase price,(1) Annual amount paid 2,04,443 2,23,614 2,25,300,Without return of purchase price,(2)  Annual amount paid without return of purchase price  2,68,663 2,80,669 2,92,500,Direct purchase from company

In case Mrs. Parlekar had taken a monthly payment from the bank, then they would have got around Rs. 4,500 per month for a period of 180 months. Along with that she would have got around Rs. 8,000 as interest of FD of the Rs. 10 lakhs that was leftover. Thus a total monthly inflow of Rs. 12,500, which is far too less compared to around Rs. 30,000 what, an annuity plan will pay off.

The best part about choosing a return of purchase price option is that the legal heir can get the purchase price back and with this purchase price, he can pay off the loan from the bank for reverse purchase and then take the property back from the bank. They will have to pay the additional interest amount to the bank from their profit. But in case the requirement of monthly inflow is high as in case of Mrs. Parleker, we recommended her to go for without return of purchase price option. Thus weighing these options we recommended to Mrs. Parlekar’s to buy the new flat and use it to pay for her pension and also she didn’t t have to liquidate the savings she had made for her children.

 

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