Using Home Equity as Retirement Plan

With real estate in a boom over the past few years, one thought that crosses peoples mind is to use ‘Home Equity’ as a Retirement Plan.

Good idea? Feels so. At least at this juncture, however like all assets it has its ups and downs. Let us look at what I mean.

What is Home Equity? It is the appreciation that your home has got from the date of purchase to the date of your retirement.

As Mumbai is the city of real housing shortage, it is in Mumbai that such deal would look very profitable. Let us say you bought a house in the nineties..and this is worth Rs. 1.5 crores now. You are about 53 years of age, and conservatively you expect this to be worth Rs. 3.5 crores by the time you retire. Assuming that once you retire there is no need for you to stay in this crowded city, you can look to going away to a smaller city / town for your retirement. So you encash the home equity – you sell off the house for Rs. 3.5 crores, buy a new house in say Baroda for Rs. 1 crore and put Rs. 2.5 crs. in a product that gives you an annuity of Rs. 20Lakhs per annum.

Apart from this you have your equity portfolio, national savings certificate, ..etc. and this is comfortable retirement. Sounds good so far, right?

What can go wrong?

1. Your children may still want to use that property: son or daughter may assume that the flat will be theirs for usage till they live.

2. You our your spouse may want to live in the place where you have lived for 20 years.

3. The building may not be in a great shape – so you pretend that it has a great resale value, but actual transactions are not going through.

4. The place in which you are staying may not be attracting good quality of new buyers again depressing prices.

5. You find that many people in your building cannot afford the new construction, so they are resisting the breakdown and new construction, so you are stuck and unable to sell.

So you go and try a Reverse Mortgage with a nationalised bank (remember the private HFCs are refusing to enter the market, let alone develop it), but the rates on offer are quite low.

So suddenly you are stuck. What do you do?

1. Keep communicating to your kids that ‘this house is mine till I am 65 and then I will be selling it off for funding the remaining part of my retirement.

2. The next part of your retirement can be in an old people’s home which does not involve too much of capex – so you get to dip into the corpus instead of looking for a return on the corpus.

3. Build a lot of other assets so that the dependance on this one single asset is reduced, quickly.

4. Be willing to accept a lower price than what you hear in the market…once in a while go to a broker and say ‘I want to buy in this locality’ and see what he says. Once in a while go to another broker and say ‘I want to sell in this locality’ and see what he has to say. There is no SCIENTIFIC basis of finding the ‘price’ of YOUR flat. It is all guess work till you sign the deal.

Remember it is possible to build your Retirement Plan with HOME equity, you need to be realistic, that is all.

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One Response to “Using Home Equity as Retirement Plan”

  1. Good post! I am sure many people will be thinking along those lines.

    BTW talking abt retirement, inflation and expenses etc. Subra Sir, pls tell us, suppose a person needs X amount a month and the corpus FD / index fund/ other returns are, say 2 X (or more) the amount per month. That balance each month would be X amount (2x-x) can be put to investment again for coping up with rising cost/inflation. Is there a generic guide line that says yes if expense is constant X and earning is 3 X then remaining balance of 2 x if invested properly will cover the inflation etc in future? Just a generic guideline. Assuming this return is just enough to tackle to inflation what is the min amount required to be generated per month. The monthly expense is kept at X.

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