The reverse mortgage, introduced by the Union Government in 2007, is an answer to financial issues faced by senior citizens, giving them a life of dignity. For senior citizens, who have a lack of regular income or financial support , this could lead to a financial crisis. In simple terms, a reverse mortgage is the “opposite” of a conventional home loan. A reverse mortgage enables a senior citizen to receive a regular stream of income from a lender (a bank or a financial institution) against the mortgage of his home. The borrower (i.e. the individual pledging the property), continues to reside in the property till the end of his life and receives a periodic payment on it.
When the home is pledged, its monetary value is arrived at by the bank, on the basis of the demand for the property, current property prices, and the condition of the house. The bank then disburses a loan amount to the borrower in the form of periodic payments, after considering a margin for interest costs and price fluctuations. The periodic payments also known as reverse EMI are received by the borrower over fixed loan tenure. With each payment, whether monthly or quarterly, the equity or the individual’s interest in the house decreases.
A reverse mortgage is an ideal option for senior citizens who require regular income, or if the property is of illiquid nature for some reason.
The Reserve Bank of India has formulated the following guidelines for a reverse mortgage.
Maximum loan amount would be up to 60% of the value of the residential property or 1 crore.
Maximum tenure of the mortgage is 20 years and minimum is 10 years.
Option of monthly, quarterly, annual or lump sum loan payment.
Property revaluation to be undertaken by the lender once every 5 years.
If at such time, the valuation has increased, borrowers have the option of increasing the quantum of the loan. In such a case, they are given the incremental amount in lump-sum.
Amount received through reverse mortgage is a loan and not income. Hence it will not attract any tax. However, a borrower is liable to capital gains tax, at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
Reverse mortgage interest rates could be either fixed or floating. The rate would be determined by the prevailing market interest rates.
The maximum monthly payments shall be capped at Rs.50,000/- or such other amount as may be notified by the Government of India.
Should be Senior Citizen of India above 60 years of age.
Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the BANK, 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 self- acquired, self occupied 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.
The prospective borrowers should use that residential property as permanent primary residence. Permanent primary residence refers to the self acquired, self occupied residential property where a person spends majority of his time. Factors that may be relevant in this regard include the address used for general correspondence, utility bills, bank statements, tax return, bank accounts and banking relations etc. However, all facts and circumstances may be considered for the purpose of determining that the residential property is the permanent primary residence of the borrower.
Commercial property will not be eligible for RML.
Determining the amount of eligibility
The amount of loan will depend on market value of residential property, as assessed by the bank, age of borrower(s), and prevalent interest rate.
The BANKs will have the discretion to determine the eligible quantum of loan reckoning the ‘no negative equity guarantee’ being provided by the BANK. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower.
The BANKs would ensure that the equity of the borrower in the residential property (Equity to Value Ratio – EVR) does not at any time during the tenor of the loan fall below 10%.
The BANKs will need to re-value the property mortgaged to them at intervals that may be fixed by the BANK depending upon the location of the property, its physical state etc. Such revaluation may be done at least once every five years, the quantum of loan may undergo revisions based on such re-valuation of property at the discretion of the lender.
Settlement of the loan
The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or to relatives. Typically, a “permanent move” may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. BANKs may obtain such documentary evidence as may be deemed appropriate for the purpose.
Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Residential Property.
The borrower(s) or his/her/their heirs/estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.
A reasonable amount of time, say up to 2 months may be provided when RML repayment is triggered, for house to be sold.
The balance surplus (if any) remaining after settlement of the loan with accrued interest, shall be passed on to the legal heirs/estate/beneficiaries of the borrower.
Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer. A borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
Highlights of Reverse Mortgage
In addition, the bank may also consider, at its discretion, obtaining a Registered Will from the borrower stating, inter-alia, that he/she has availed of RML from the bank on security by way of mortgage of the residential property in favour of the bank , meaning thereby that in the event of death of the borrower (and co-borrower, if any), the mortgagee is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s).
The bank may consider ,at its discretion, taking an undertaking from the prospective borrower that the “Registered Will” given to the bank is the last “Will”, prepared by him/her at the time of availment of RML facility as per which the property will vest in his/her spouse/beneficiary name after his/her demise. The borrower will also undertake not to make any other ‘Will’ during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the banks favour by way of creation of mortgage on the immovable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower’s death.
The bank will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities.
The bank will ensure that borrower(s) pay all taxes, electricity , water charges and statutory payments.
The bank will ensure that borrower(s) are maintaining the residential property in good and saleable condition.
The bank may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures.
The bank reserves the right to inspect the residential property/premises or arrange to have the residential property/premises inspected by its representatives any time before the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of such inspections.
Reverse EMI per month
As amended in the Union Budget 2008-2009, payments received under Reverse Mortgage Loan are not taxable.
A new clause (xvi) in section 47 of the Income-tax Act, 1961 has been inserted to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer.
The second issue is whether the loan, either in lump sum or in instalment, received under a reverse mortgage scheme amounts to income. Receipt of such loan is in the nature of a capital receipt. Section 10 of the Income tax Act, 1961 has been amended to provide that any amount received by an individual as a loan, either in lump-sum or in installment, in a transaction of reverse mortgage referred to in clause (xvi) of Section 47 of the Income-tax act shall not be included in total income.
A borrower, under a reverse mortgage scheme, shall, however, be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
Any transfer of a capital asset in a transaction of reverse mortgage shall not be regarded as a transfer. A borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.
· The loan shall be liable for foreclosure due to occurrence of the following events of default.
· If the borrower has not stayed in the property for a continuous period of one year
· If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.
· If borrower(s) declare himself/herself/themselves bankrupt.
· If the residential property so mortgaged to the PLI is donated or abandoned by the borrower(s).
· If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house; adding a new owner to the house’s title; changing the house’s zoning classification; or creating further encumbrance on the property either by way taking out new debt against the residential property or alienating the interest by way of a gift or will.
· Due to perpetration of fraud or misrepresentation by the borrower(s).
· If the government under statutory provisions, seeks to acquiring the residential property for public use.
· If the government condemns the residential property (for example, for health or safety reasons).
Popularity In India
However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.
“In the first place, it is a predominant tendency for Indians to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation, and would be liquidated only as a last resource. Also, the elderly tend to hold a place of importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years.”
Property ownership in India is considered as an inheritable subset, which is ideally handed over to the legal heirs. Also, the owned property is considered for trade unless there is a substantial benefit or imperative financial crisis of owner.
Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh – Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.
Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan. “This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter