With increasing life expectancy, rising medical expenses, low pension coverage and families increasingly going nuclear, many senior citizens do not have adequate cash flow to sustain themselves.
To help people tide over such situations, the government introduced the concept of reverse mortgage in 2007. People above 60 years of age owning a house or property, can mortgage it with a bank to get regular income in the form of monthly payout or combination of monthly payout and lump sum amount. While it is popular abroad, it has not caught on in India because of high interest rates—in the range of 11-12.5% and emotional attachment to a property.
Who can opt for this
House-owning senior citizens can avail this loan to meet their financial needs for renovation or repairs, medical expenses, etc. However, the money cannot be invested in shares and real estate. The property against which the borrower wants to raise the loan should be self-acquired and self owned. Banks do not consider inherited property because of the encumbrance hassles that may arise at a later stage. The loan amount will be based on the value of property as assessed by the lender, age of the borrower and the prevalent interest rate.
Typically, banks offer 40-50% of the market value of the residential property. The maximum period of the loan is usually 20 years if the borrower is aged 60-65 years. For those above 65, the maximum repayment tenure is 20 years. One can avail loan either singly or jointly with spouse older than 55 years. Banks will charge a one time pocessing fee, usually 0.5% of the loan amount.
How banks recover payouts
There is no compulsion for the borrower to service the loan during his lifetime or till such time he continues to stay in the house. The bank will have the right to sell the property after the borrower passes away to recover the loan and any proceeds in excess of the sum due to the bank is returned to the legal heirs.
However, borrowers have the option to prepay the loan at any time without any pre-payment penalty. Also, the legal heir can repay the loan with accumulated interest and get the mortgage released without letting the property being sold by the bank.
The government introduced the scheme under the Finance Act 2008 and all payments under the scheme were made tax-exempt. If the borrower or his legal heirs do not sell the property but pay the full dues from other resources, then there would be no tax implications. A borrower will be liable to income tax on capital gains only when the property is disposed of by the lender.
Should you opt for it?
Analysts say if the shortfall in small, then it is better to look for alternative source of funding like liquidating some deposits or by doing portfolio reshuffling. “Even if one is opting for reverse mortgage, one should not take lump sum to invest the amount in annuity products of life insurance as the pension from an insurance company is fixed forever,” says Brijesh Damodaran, managing partner, BellWether Advisors LLP.
Also, annuity income is taxable at marginal rates in the hands of the recipient. But regular payouts received from banks are tax-free as they are treated as loans. The documentation for reverse mortgage is also tedious and complicated. So, one should look at all the options before taking a final decision.