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What is Reverse Mortgage ? :
The scheme of reverse mortgage has been introduced in India for the benefit of senior citizens owning a house but having inadequate income to meet their needs. The scheme is more or less reverse of the regular home loan. When one buys a house through a home loan, every EMI it pays towards servicing the loan increases its equity in the house. Once loan is paid in full, equity in the house becomes 100 per cent.
However, in the case of reverse mortgage, one actually pledges house with the bank, and its equity decreases with every disbursal that the bank makes to him/her. In case of a home loan, one takes a lump sum loan and repays it in installments in future. Under the reverse mortgage scheme, one gets installments and the loan is repayable in lump sum in future
Who are Eligible to Opt for Reverse Mortgage in India :
Reverse mortgage was introduced to India in 2007. This proposal was passed in a budget that took place during this period. Any person, who is above of the age of 60 years and owns a house with no outstanding loan against the property he wishes to mortgage, is eligible to get a reverse mortgage loan. If there are two applicants then the co-applicant (usually the wife) will have to be at least 55 years of age. In Budget 2008-09 certain amends were introduced in the income tax act to clarify tax exemption on reverse mortgage loans. Earlier, the Transfer of Property Act considered any mortgage as a transfer. The IT Act however, had a different definition for transfer. The amendments have been made to the Section 10 of the IT act. The ministry has introduced a new clause 10(a) in section 47 that says a reverse mortgage will not amount to a transfer. Further Amendment in the Scheme have been done vide CBDT vide Notification No. 79/2013 dated 07.10.2013. After these amendments, Reverse Mortgage Scheme provides for disbursing the loan to the ‘annuity sourcing institution’ for the purpose of periodic payments by way of annuity to the reverse mortgagor. Earlier, the period of reverse mortgage loan was 20 years from the date of signing the agreement by the reverse mortgagor and the approved lending institution. But, now the period has been extended to "the residual life time of the borrower". “Annuity Sourcing Institution” has been defined to mean Life Insurance Corporation of India or any other insurer registered with the Insurance Regulatory and Development Authority.
What is the importance of Reverse Mortgage for Senior Citizens
Reverse mortgage is a blessing for the elderly as it allows them to generate good income from their homes after retirement. The most important aspect of this scheme is that they can still continue to live in the same house till the end of their life. For most Senior citizens, the house is the largest component of their wealth. Reverse mortgage scheme has proved itself as a boon for senior citizen who do not have a regular income of sources or who do not have children to take care of them in their old age; reverse mortgage has also given a self dependence to them.
Guidelines by RBI
· Maximum loan amount would be up to 60% of the value of the residential property
· Prior to the amendment of 2013, the loan was extended as regular fixed monthly annuity up to a max period of 20 years OR till the death of the last surviving spouse, whichever was earlier. These loans were allowed as either periodical payment or lump sum payment. After the amendments, the approved lending institutions are allowed to disburse the amount of the loan to the “Annuity Sourcing Institution”. Moreover, now the tenure of reverse mortgage loan has been extended from 20 - years to the residual lifetime of the borrower where the loan is disbursed to the “Annuity Sourcing Institution” (which includes LIC and any other insurer registered with IRDA). Option of monthly, quarterly, annual or lump sum loan payment is now available. However, the aggregate of the amount disbursed as lump sum payments will not exceed 50% of the total loan amount sanctioned
· Property revaluation to be undertaken by the lender once every 5 years
· Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower
Interestingly, a reverse mortgage loan becomes due only when the last surviving borrower dies, or when the borrower chooses to sell the house during his life. Usually on the death of the last surviving borrower, the bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property. Thus, Settlement of Loan, along with accumulated interest, is actually met by the proceeds received out of sale of residential property. Any surplus on the sale of the property is paid to the legal heirs.
Tax Implications :
· Section 47 prescribes certain transactions, which are not regarded as transfers which means that no capital gain tax is payable on such transactions. The Finance Act, 2008 inserted clause (xvi) in section 47 w.e.f. assessment year 2008–09, to provide that nothing contained in Section 45 shall apply to any transfer of a capital asset in a transaction of Reverse Mortgage under the scheme made and notified by the Central Government. Thus, the act of mortgaging the capital asset under the reverse mortgage scheme will not be treated as transfer affecting any tax liability.
· Further, section 10(43) of the Income Tax Act, 1961 provides 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, 1961, shall not be included in total income. Thus, the amount received through reverse mortgage is considered as loan and not income and hence the same will not attract any tax liability.
· However, as and when the property is disposed of, either by the approved institution or by the borrower or its legal heirs, normal provisions of capital gains will apply and the owner or his legal heirs shall be liable to pay capital gains tax as per the provisions applicable to the general sale of property.
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Some other Rules for Reverse Mortgage Loans :
1. Objective of Loan is to meet the financial needs of senior citizens owning self occupied property (house) through regular income / supplementing pension / other income, for their day to day requirement.
2. The house must be in the name of the borrower> He / she should have a clean title. Ancestral properties are therefore discouraged.
3. Death of one of the spouses: If one of the spouses dies, the other can still continue living in the house. Only on death of both, settlement of the loan takes place.
4. The borrower must be living in the said property.
5. The house must be insured with a large residual value, for a period of at least 15- 20 years.
6. If the borrower is the sole owner of the house, his will should pass it on to his spouse only. He will have to state that this is his last will and he should get it registered.
7. Borrowers can prepay the loan at any time during the tenor of the loan, at no prepayment penalty or charges.
The property is valued before the loan is sanctioned and depending on the value
the amount that has to be sanctioned will be decided. Revaluation in regular
intervals of 3 years or 5 years and based on the revalued reports the amount
will be revised. This happens based on the depreciation in value of property.
Disadvantages of a Reverse Mortgage loan:
· There is a lengthy documentation procedure. Banks require various documents of the property. For a senior citizen, this procedure could be tedious, complicated and difficult to understand;
· The monthly pay outs are fixed. Usually there are no provisions to increase this amount in case of an emergency or contingency (Some institutions allow some lump sum payments for contingencies).
· Variation in interest rates and loan amount during the time of valuation can turn into serious problems at times. The terms and conditions of the reverse mortgage loan are to be studied and taken care of before purchasing it.
[This is a topic which has not been much discussed and concept is still not popular among senior citizens. Therefore, readers are welcome to give any additional points or improvements through comments column below.]