Most people cherish a lifetime ambition to own a house property, which normally materialises while they are in active economic pursuit. Time comes, soon after retirement to reflect upon the need for cash resources to sustain their livelihood. Though they may own, possess and enjoy staying in that house, cash flow issues crop up and at this juncture, owning house may be a luxury.
Here comes the tool of Reverse Mortgage Scheme which is a tailored product to monetise the locked up equity in the “asset” and lends support to the liquidity- starved elderly home owners. Through Reverse Mortgage, the owner of the House is not only able to draw upon the escalating real estate prices but also lead a comfortable life, without having to dispose of the property.
This scheme does not involve losing ownership of the house and at the same time a stream of cash flow is arranged at periodic intervals, depending upon the mode of disbursement desired. The safety net for the lender is the security of the house, whose value is always on the rise.
However, before deciding on reverse mortgage, one should weigh the option, in terms of upfront cost, impending decision to join the children or the adequacy of current income to support his family. As otherwise it may not make an economic sense from cost-benefit angle.
This novel product is intended for those senior citizens who could not maintain their standard of life as hitherto before and whose income-flow is much reduced after retirement. This is particularly beneficial for those relying on income received from pension without any fall back options. To define, it is an agreement by which a house owner borrows against equity in his house and receives regular tax free payments from the lender.
Salient Features of Reverse Mortgage
- One can stay in his own home and avail a continuous stream of cash flows to life time or for a time period of 15 years, by mortgaging the house with a Housing Finance Company or a Bank, (the lenders).
- There is no servicing of loans and consequently credit worthiness and repaying capacity need not be assessed.
- On the borrower’s death or on the borrower leaving the home permanently, the property is sold and the loan repaid along with accumulated interest or alternatively the borrower or legal heir can repay without resorting to sale at the appropriate point of time.
- Lender is required to revalue the house once in every 5 years and adjust the quantum of moneys provided.
- Right of rescission: The borrower can rescind the contract within three business working days, after all documentation, if he changes his mind.
- Modes of disbursement: The loan can be drawn as a lump sum, or by way of fixed monthly payments for a set term/or until one lives in the home, or as a line of credit, or a combination of these.
- Utilisation of the loan funds: The proceeds from reverse mortgage can be used for supplementing post-retirement pension, undertaking repairs and renewals for the property, meeting medical expenses or settling any outstanding debts.
- Size of the cash flows: As per draft guidelines, the following percentage of the value of house can be availed as loan by the borrower depending upon his age group.
Amount Eligible for Reverse Mortgage
|Age Group||Eligible Quantum|
|60-70||45% of the value of the property|
|71-75||50% of the value of the property|
|76-80||55% of the value of the property|
|Above 80||60% of the value of the property|
Eligibility for Availing Reverse Mortgage
The conditions for availing the loan under the Reverse Mortgage scheme are: –
- The borrower should be 60 years of age & above
- There should be a clear title indicating the prospective borrower’s ownership of the property. Couples also will be eligible to borrow jointly subject to the above condition.
- Only residential houses are eligible for this scheme and not commercial properties. As per guidelines, this product cannot be provided for speculative or trading purposes.
To establish clear title, the existing mortgage, if any, may be paid off by utilising the proceeds of reverse mortgage and use the balance of the loan proceeds for other purposes as herein above mentioned.
To illustrate, take the case of a senior citizen of the age of 80. He has an outstanding mortgage loan of Rs. 15,00,000 and his house property is worth on date Rs.40,00,000. The amount of loan that could be made available under reverse mortgage is 60% of the value of the property, i.e., Rs. 24,00,000. He can pay off the existing mortgage with Rs. 15,00,000 drawn as lump sum under reverse mortgage and arrange for receiving the balance of the eligible loan on monthly basis for a set term.
Discharge of the Reverse Mortgage Loan
After the term of loan or demise of the borrower, the lender recovers the amount of outstanding loan and accumulated interest from the sale proceeds of the house and passes on the surplus to the estate of the borrower.
It is important to mention here that Loan shall become due and recoverable only when the last surviving borrower dies, or would like to sell the house or permanently moves out of the house for aged care institution or decides to stay with relatives.
On the expiry of the set term the borrower himself can arrange to repay the loan from his private resources or on the demise of the borrower, his legal heirs can come forward to settle the loan and take over house property.
Prepayment of loan is also possible and the lender may waive prepayment premium.
Taxation of Borrowers in India
The proceeds from reverse mortgage being payments on capital account will be exempt from taxation. It may be argued that the aggregate amount of loan obtained may be appreciate more than the cost of acquisition of the property and there is always an element of profit embedded which needs to be brought to tax. It is pertinent to point out here that on sale of house property, capital gain is taxed. And as such there is no taxability on raising or receiving the periodic instalments of loan.
The following points are also important from the taxation point of view:
- As borrower himself has to occupy the house, (to be eligible for this scheme), the income from this house will be deemed Nil.
- Where the house is renewed or repaired with such borrowed money, the interest attributable to the moneys spent on repair or renewal would be eligible for deduction in the computation of income under the head income from house property.
- On the sale of the house under appropriate circumstances as outlined elsewhere herein above, the issue relating to Capital Gains Tax is to be addressed. Normal computation will be employed for ascertaining the capital gains subject to tax. However, the repayment of loans at the end of the term will not be allowed as a deduction, in the computation of capital gains, as the loan was taken by the home owner and not by any previous owner. The capital gain so computed will be payable by the estate of the deceased borrower/legal heir or if he survives beyond 15 years, by the borrower.
- Where, on the demise of the home owner, legal heir settles the loan and takes possession of and title to the house property, and later on sells the same, the loan so discharged is also considered as cost as per legal pronouncements. However views differ on the applicability of indexation as to whether from date of discharge of loan or date of purchase of house property by the previous owner.
Taxation of the Lender in India
Since the recovery of interest on the outstanding loan is postponed along with the loan amount, which could be realised only in the event of sale, after the maximum period of 15 years or demise of the house owner, or legal heirs coming forward to discharge the loan, the lender is exposed to income tax every year on interest income, taken credit for, without any cash accruing to them. Any loan which is not recoverable fully, against the sale proceeds of the house, on the particular point of time, can well be treated as bad debt and deduction can be claimed. But the periodic review of the value of the house property every 5 years and the adjustment in loan amount to be disbursed would protect the lender from any such eventuality.
How many times can a person avail of the facility of Reverse Mortgage?
Reverse Mortgage Refinancing by the same person
A question may also arise as to whether another reverse mortgage could be entertained if the house owner survives beyond the maximum period of 15 years and if he could arrange to repay the loan and interest from private resources or with the help of his legal heirs without selling the house. Though there is no explicit guideline on this point, when the loan is cleared after 15 years without resorting to sale option, the home owner would be able to re-enter the scheme for another term.
Reverse Mortgage Financing by the Legal Heir
Yet another situation could be where the house property which was once a subject matter of reverse mortgage was redeemed on the expiry of the term/death of the mortgagor, by his son, who is also above 60 years. He does not have a house of his own and takes possession of and assumes legal title to the house, left behind by his father. He draws up a plan to get a steady income of ‘x’ amount every month from this property, whose value has by then gone up many times. The possibility of again negotiating for a Reverse mortgage thereof could not be ruled out. It does not make it condition under this scheme that the house acquired by the individual alone could be mortgaged. Even property acquired by way of gift and held by a person who has attained the age of a senior citizen can be used for reverse mortgage transactions.
Reverse Mortgage Refinancing of more than 1 house
The question whether a senior citizen owning more than one house can avail loan under this scheme, from all the houses he owns, is only of academic interest. In theory, as the property values are on the ascendancy and the senior citizen may like to lead a better life by leveraging on the booming real estate market, he can well do so, if only the lender’s interest of full recovery after the term is assured. There is an additional benefit in that the rental receipts from other houses also go to enhance the cash resources for the senior citizen.
The latent purpose of this kind of housing loan envisaged in the Budget is to enable the cash-starved senior citizens, enjoy the fruits of hard labour in their olden days. A main criterion for this loan is that the senior citizen should live in that house. Being a social security measure the concept of this scheme cannot be and should not be applied to more than one house which the senior citizen decides in to live in.