Meaning of Reverse Mortgage
Reverse Mortgage means a mortgage of a capital asset by an eligible person against a loan obtained from an approved lending institutions (being National Housing Bank or any housing finance company registered with it or any schedule bank). However, it does not include a transaction of sale or disposal of the property for settlement of the loan.
- Should be Senior Citizen of India, above 60 years of age.
- Married couples will be eligible as joint borrowers provided one of them is above 60 years of age and age of spouse is not below 55 years at the time of application.
- Should be the owner of a residential property (house or flat) located in India in his/her own name.
- The property should be free from any encumbrances.
Residential property should be used as permanent primary residence (fully self occupied property).
The Commercial property will not be taken as a security under the product.
Features of RMLS (Reverse Mortgage Loan Scheme, 2008)
- Reverse Mortgage Loan (RML) enables a Senior Citizen i.e. above the age of 60 years to avail of periodical payments from a lender against the mortgage of his/her house while remaining the owner and occupying the house.
- The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender.
- RMLs are extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB.
- The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate.
- The loan can be provided through monthly/quarterly/half-yearly/annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three.
- The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.
- Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once every five years.
- The quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender.
- The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence.
- The lender will have limited recourse i.e. only to the mortgaged property in respect of the RML extended to the borrower.
- All reverse mortgage loan products are expected to carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.
- On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property.
- The borrower(s)/heir(s) can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.
- The borrower(s) or his/her heirs also have the option of prepaying the loan at any time during the loan tenor or later, without any prepayment levy.
- In case you outlive your loan tenure, you will continue to live in your house. However, the lending institution may stop the monthly payments to you if the unlock able value of the property has already been exhausted.
Quantum of loan
The loan amount would be 90% of the value of property maximum of Rs. 100 Lakhs (Rs. 1 crore)
Tenor of Loan
The maximum period of the loan is 20 years. (Maximum period over which the payments can be made to the reverse mortgage borrower).
Disbursement of Loan
The money can be credited into your savings bank account or in a joint account-with the either or survivor option-in the same bank either on a monthly or quarterly basis, or as a one-time lump sum payment.
Rate of Interest Charged by Bank
The rate of interest on the reverse mortgage loan typically varies between 10 per cent and 12 per cent. However, you will not be required to pay this interest once you vacate the premises permanently.
The Interest rate is not fixed, most of the lending institutions have a reset clause of five years, Central Bank of India and Dewan Housing Finance has a reset clause of three years.
So, after the scheduled period, both the value of the house as well as the rate of interest will be re-evalued and necessary adjustments will be made in your monthly payments.
Loan Processing Fee
Processing fee typically varies between 0.15 per cent and 1.50 per cent of the loan amount. In some cases, apart from specifying the percentage of loan amount as processing fee, they also have an upper limit as to how much they can charge as processing fee.
Tax Consideration on Reverse Mortgage Loan
The Finance Minister, in paragraph 89 of his speech, while presenting the Union Budget, 2007-08, had announced that the National Housing Bank (NHB) will introduce a reverse mortgage scheme for senior citizens.
In the context of the aforesaid scheme, it was necessary to resolve the tax issues arising there-from. The first issue is whether mortgage of property for obtaining a loan under the reverse mortgage scheme is transfer within the meaning of the Income-tax Act thereby giving rise to capital gains. Section 2(47) of the Income-tax Act provides an inclusive definition of ‘transfer’. Further, ‘transfer’ within the meaning of the Transfer of Properties Act includes some types of mortgage. Therefore, a mortgage of property, in certain cases, is a transfer within the meaning of section 2(47) of the Income-tax Act. Consequently, any gain arising upon mortgage of a property may give rise to capital gains under section 45 of the Income-tax Act. However, in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property.
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 installment, 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.
Repayment / Settlement
The loan shall be liable for foreclosure due to occurrence of the following (events of default).
- If the borrower(s) has/have 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(Bank 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 Bank 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 e.g., renting out part or all the house by creating a tenancy right, 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 of taking a 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 acquire the residential property for public use.
- Any other event such as re-marriage of the borrower(s) etc which shall have an adverse impact on the loan settlement prospects.
- Borrowers do not accept the revised terms on revaluation of property and interest rates at the end of every 5 years from date of sanction.
Reverse Mortgage Lenders in India
- ndian Bank
- State Bank of India
- Punjab National Bank
- Bank of Baroda
- Central Bank of India
- Union Bank of India
- LlC Housing Finance
- Andhra Bank
- Corporation Bank
- Canara Bank
- Allahabad Bank
A brief comparison of salient features of reverse mortgage loans offered by key public sector banks yielded the following details
MAXIMUM LOAN AMOUNT
MAXIMUM LOAN TENURE
15 years (subject to extension)
15 years (if you are between 58 and 68 years) and 10 years (if you are above 68 years of age)
20 years, extendable up to lifetime of the homeowner
LUMP SUM PAYMENT OPTION
MAXIMUM LUMP SUM AMOUNT
No cap specified
50% of the loan, maximum 15 lakhs
25% of Loan, maximum 15 lakhs
Disadvantages of a reverse mortgage loan
- Although reverse mortgage loan can act as a source of survival during old age it can always be called a last resort. It has few demerits which have to be noted before planning for a reverse mortgage loan.
- Pledge the property to loan lender means officially giving loan provider the right to sell the house to recover the loan. If the owner of a house is willing to transfer the ownership to someone after his/her death then this loan is not to be considered as a source of income.
- High rate of interest compared to other loans.
- 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. Everything from factors related to title of property, valuation of property, lending limits should be considered before choosing a particular mortgage loan.