Your money: Home truths about reverse mortgage

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Updated: April 17, 2015 1:28:29 AM

With families increasingly going nuclear, many senior citizens have been left to fend for themselves.

With families increasingly going nuclear, many senior citizens have been left to fend for themselves. In the backdrop of spiraling healthcare costs and inadequate social-security backup, the need for a regular stream of cash flow has become a challenge. In a society where housing is considered the largest component of one’s wealth, monetisation of this asset could be explored.

What is reverse mortgage scheme?

Reverse mortgage scheme helps a senior citizen avail periodical payments from a lender against the mortgage of his house while remaining its owner and occupant. The borrower is not required to service the loan during his lifetime and, therefore, doesn’t need to make monthly repayments of principal and interest.

If the borrower dies or leaves the house permanently, the loan is repaid, along with accumulated interest, through the sale of the property. The borrower/heir can also repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

Development over the years

The scheme was introduced under the Finance Act 2008. Following tax benefits were offered:

(a) All payments under the scheme were tax-exempt; (b) Any transfer of a capital asset in a transaction of reverse mortgage would not be regarded as a transfer; (c) A borrower will be liable to income tax on capital gains only at the point of alienation of the mortgaged property by the mortgagee recovering the loan.

The scheme was amended in 2013 to provide for disbursing the loan to an annuity sourcing institution, viz., the LIC or any other insurer registered with the Insurance Regulatory and Development Authority of India. Further, the tenure of the loan was extended from 20 years to the lifetime of the borrower.

Benefits

Income supplement: The scheme enables senior citizens to meet their financial needs for renovation/repairs to house or meet medical and other personal requirements.

Credit standing of the borrower: Unlike other loans, the borrower does not have to submit any income proof.

Retaining ownership: The borrower continues to retain ownership of the house.

No repayments: A borrower does not have to repay the loan during his or her lifetime or till such time he or she continues to stay in the house.

Freedom and flexibility: Amount availed under the scheme may be utilised for any purpose other than investing in shares, real estate, trading, etc.

The flipside

Indian mindset: It is a general tendency in our country to consider a house as a family asset which is inherited by the future generations. Further, there is a general negative connotation to living on credit.

Self-acquired property: The house must be self-acquired. Banks are reluctant to consider inherited property due to encumbrance hassles that may arise at a later stage.

The interest factor: The income offered by the bank is not that attractive since it is a loan product from a bank, which is again more dependent on the interest rate environment.

Lengthy documentation: For a senior citizen, the procedure could be tedious, complicated and difficult to understand.

Though introduced in 2007, the scheme has not gained much popularity in India. The NHB has provided guidelines for this scheme. However, the actual modalities vary from bank to bank.

There is inadequate marketing of the product.

The writer is partner with Deloitte Haskins & Sells LLP. Inputs from Rajeswari Balasubramanian, manager, Deloitte Haskins & Sells LLP

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