Reverse mortgage: Boon for senior citizens
In the wake of ever-rising prices of real estate, many senior citizens find themselves trapped in staying in a palatial house but their pension and interest incomes are hardly sufficient to look after their daily necessities, including the ever-rising medical bills.
The instrument of reverse mortgage loan has been specially designed for such senior citizens without having to sell their homes during their life time. As the name suggests, reverse mortgage is the opposite of home loan. While a home loan enables one to buy a house in installments, a reverse mortgage enables a house owner to sell his house in installments. He gets funds at regular intervals by agreeing to sell his house to the lender after his death.
CBDT notification 93 / 2008, dt 30.9.08 has formalised the scheme. The main features are —
n Available to any individual of 60 years or above or married couple with either spouse satisfying this age limit.
n Approved lending institutions are i) NHB, ii) some scheduled banks and iii) housing finance companies registered with NHB.
n The residential house should be located in India and owned by the applicant, free from any encumbrances. The institution may charge a nominal amount as processing fees.
n The institution shall obtain and maintain the following particulars of the house owner i) Name, address and PAN of self and all the legal heirs, ii) Total area, including built-up or covered area, iii) Cost, year of its acquisition and improvement and iv) Copy of the registered will including any changes made therein during the currency of the term of the loan.
n Disbursement of loan can be made for any regular periodicity, monthly, quarterly, half-yearly or annually or lump sum payment in one or more trenches, not exceeding 50 per cent of the loan amount.
n The maximum term of the loan should be 20 years from the date of signing the agreement.
n Prepayment of the loan will not attract any charges or penalty.
n The owner is not required to make any interest payments or repayments against the principal. On his demise, the inheritor can settle the loan and retain the house, failing which, the lender can sell the house, recover the dues and hand over the balance to the nominee or the legatee.
n The loan can also be used for upgrading, renovation, and extension of residential property. A lump sum payment can also be opted for but this will be limited to special requirements such as a medical emergency, maintenance, renovation, etc.
n The amount of loan will depend on three factors — the market value of the property as assessed by the lender, the age of the borrower and the prevalent interest rate on the loan.
n Fixed and floating rate of interest may be offered, subject to a transparent disclosure of the terms and conditions.
n Assuming a loan to value ratio of 60 a house worth Rs 40 lakh would attract a loan of Rs 24 lakh, which can be converted into a 15-year annuity (monthly income) of Rs 5,530 (Source: NHB calculator). The money cannot be used for speculative purposes such as investing in shares, real estate, trading, etc.
n The facility will be restricted to only a self-acquired and self-occupied residential property, owned by the senior citizen, and which has a residual life of at least 20 years. If it is an ancestral property, the borrower will have to take consent from the relatives who may have a claim on the estate.
n If one of the borrowers dies, the surviving spouse will continue to get the payments and is allowed to stay in the mortgaged house during his / her life-time, subject to foreclosure clauses.
n If the last owner outlives the tenure of the loan, the payments will stop. The interest will keep on accumulating till the accounts are settled out of the sales proceeds or otherwise.
n There is a provision to revaluate the property once every 5 years and reset the amount of loan or the tenure. If at this time the valuation has increased, the borrowers have the option of increasing the loan amount, payable in lump sum. Finally, the maximum loan amount that one can hope to get is around Rs 1 crore (including interest), which will yield a monthly stream of nearly Rs 20,000.
To offer an insurance mechanism to the lenders, especially against the borrower outliving the term of the loan, on 15.2.07, RBI issued guidelines on Registration and Operations of Mortgage Guarantee Companies. These will enter into a tripartite contract among the borrower, the creditor institution and itself to guarantee the repayment of the principal and interest outstanding in the loan.
The annuities offered are same as those linked with SAF. This includes single or joint life with spouse and also with or without return of capital on death.
Tax aspects
As per Sec. 10(43) the amount received by the owner of the house (even if it is is monthly installements) is, at the end of the day, a loan and therefore it is exempt from income tax. Moreover, as per Sec. 47(xa), any transfer of a capital asset in a transaction of reverse mortgage shall not be regarded as a transfer. If and when the house is finally sold, the provisions of capital gains tax will arise in the hands of the borrower or his heirs.
At end
All said and done, reverse mortgage is a good option for those who while they own real estate, may require liquid funds for day to day consumption.However, those not needing liquidity and day to day income may choose not to opt for this product in view of the high processing expenses and also high interest rate.
The authors may be contacted at wonderlandconsultants@yahoo.com.