India as a country has always been rich in its culture and people. But over a period of time a cultural shift towards modernization and westernization has altered many things in our society. One such cultural change is the concept of Joint Families. The concept of Joint families also changed to smaller families ever since the concept of privacy in people life gained importance in the modern culture. As a result, there are noticeable cases particularly for the elderly who lack many kind of support including the financials support from their loved ones/children. Also the cost of their medical treatment in the old age increases which further worsens their financial crises.
Hence with due respect to the elderly who want to live independently, the Union Government of India introduced the concept of Reverse Mortgage in order to secure their financials requirements so that they can meet their day-to-day livelihood expenses and increasing cost of medical treatments.
What is Reverse Mortgage?
Meaning: Reverse Mortgage helps the senior citizen above the age of 60 years to avail of regular/periodical payments from Banks/Non Banking Financial Institutions (NBFC) against the mortgage of their house while still remaining the owner of the house and occupying the same.
The Banks/ NBFCs uses various factors such as individuals age, prevailing interest rates etc. to calculate the value of the property. However the minimum residential life of the property should not be less than 20 years. Under Reverse Mortgage an individual can avail the payments in combination of periodical, lump-sum or in the form of a committed line of credit.
The interest rates in Reverse mortgages could be either fixed or floating determined by the prevailing market interest rates and may vary from bank-to banks. Unlike other loans the interest amount in this types of loan is rolled into the loan balance, thus gives an additional relief for the borrowers, as he doesn’t have to pay anything upfront. Also the borrower does not have to repay the loan borrowed under reverse mortgage during his life, lifetime or till such time he continues to stay in the house. The entire loan balance along with the interest + mortgage insurance availed if any becomes payable only when the borrower sells the house or moves away permanently or when the last surviving borrower dies OR at the event when borrower willingly pre-closes the loan with no foreclose or penalty charges.
In the event of the death of one of the spouse, the other can still continue living in the house and enjoy the benefits of reverse mortgage loan. Only on the death of both, the Bank/NBFC makes the settlement of the loan. The lender Bank/NBFC holds the right to sell the property, in the event of the death of the borrower and recover the loan + interest accrued on loan. Any sale proceeds beyond the loan borrowed goes to the legal heirs. However any sale proceeds which are lower than the loan borrowed + accrued interest, the loss is borne by the bank.
However if the legal heirs whish not to sell the property they can repay the entire loan along with the interest accrued on the loan and get the mortgage released.
There are mainly two types of Reverse Mortgage available in India markets:-
Regular Mortgage – In regular mortgage the Bank/NBFCs calculates and makes monthly payment to the borrower directly. The interest on mortgage will accrue only on the payouts. In any event, of the death of the borrower only the payouts will be recovered.
Reverse Mortgage Loan enabled Annuity – (RMLeA) – in RMLeA the Banks/NBFCs makes a lump-sum payment to a life insurance company, which calculates the monthly payouts based on the actual pricing models that it will pay for lifetime. This monthly payment is called annuity and is higher than regular monthly payouts one gets from the regular mortgage. The insurer is able to give higher payouts it invests the lump-sum amount received from the banks/ NBFCs and earns returns on it. Since the lump-sum amount is paid in RMLeA, the interest is levied on the entire loan amount. In any event of the death of the borrower, the Bank/NBFC will recover the entire loan amount.
There are not many Banks/NBFCs who offer RMLEA in India.
Important Aspects in Reverse Mortgage:-
1) Eligibility – any senior citizen having minimum age of 60years can apply for Reverse Mortgage. If a couple seeks a joint loan then the minimum age limit for the spouse is 55 years or above.
2) Reverse Mortgage does not require any Income or Credit Score requirements.
3) The applicant –senior citizen must possess a self acquired and self owned or jointly owned property with the spouse. Ancestral properties cannot be secured for Reverse Mortgage.
4) No commercial property is eligible for Reverse Mortgage.
5) LTV (Loan To Value) – Banks / NBFCs offers up-to 60% of the market value of the residential property in Regular reverse mortgage while in RMLeA the LTV is 90% of the market value.
6) The minimum residential life of the property while taking Reverse Mortgage should not be less than 20 years.
7) Tenure – minimum and maximum tenure for regular reverse mortgage is 10 years and 20 years respectively. Whereas in RMLeA the tenure is provided till the lifetime of the borrower’s age.
8) The property should have clear title and should be free from any encumbrances.
9) Disbursements – the loan can be provided through monthly, quarterly, half yearly or annual disbursements or as a lump-sum or as a committed line of credit or as a combination of the three.
10) Under Reverse Mortgage the maximum loan limit has been capped to 50lacs-1crore by the Banks/NBFCs.
11) The ceiling limit in monthly payment plans is maximum of Rs 50,000 and 50% of the loan amount is the maximum lump-sum limit subject to the cap of Rs. 15 Lakhs.
12) Money borrowed in reverse mortgage cannot be used for any business or trading purposes or for investments in shares or real estate/ properties. They can be used only for a specific purpose like meeting the day-to-day livelihood expenses and the medical treatment of the borrower, spouse or dependant person, repairs and renovation of the property.
13) Cost incurred for availing reverse mortgage – usually Banks/NBFCs charges 0.50% of the of the loan amount as the processing fees. Post sanction also a stamp duty is payable for loan agreement and mortgage.
14) There is no pre-part payment charges involved in reverse mortgage loans.
15) The Banks / NBFCs will undertake the revaluation of the property once every 5 years. In such scenario, the borrower stands a chance to avail the additional loan amount of the valuation of the property increases on the revaluation. In such a case the borrower receives the incremental amount in lump-sum.
Tax Benefits for Reverse Mortgage:-
All payments under reverse mortgage is exempt from Income Tax, under section 10(43) of the Income Tax Act, 1961. Amount received through reverse mortgage is the loan and not a income, hence it will not attract any tax.
However, in the case the property is sold by the lender Bank/NBFC, the borrower is liable to pay the income tax on the capital gain derived on selling the property. Also the annuity income in the hands of the borrower is taxable.
If the borrower or his legal heirs repays the entire loan amount from any other sources without selling the property – no tax shall be levied.
Foreclosure of Reverse Mortgage:-
The loan may be liable to foreclose on the occurrence of certain events of default:
- If the borrower does not stay in the property for a continuous period of 1 year or more.
- If the borrower fails to pay property tax and other statutory payment pertaining to the house.
- If the borrower fails to insure the house and pay the home insurance.
- If the borrower declares himself as bankrupt.
- If the borrower donates or abandons the property.
- If the borrower commits faults or misrepresentations.
- If the borrower sells of part or entire house, adds new owner to a property title or by creating any other encumbrance on the property by the way of taking out new debt against it or alienating the interest by the way of gift or will.
- If the government condemns the property for health or safety reasons.
- If the government under statutory provisions seeks to acquire the residential property for public use.
Few of the Banks/ NBFCs which provides Reverse Mortgage in India are listed below:-
- State Bank of India (SBI).
- Central Bank of India.
- Indian Bank.
- Punjab National Bank (PNB).
- Andhra Bank.
- Canara Bank.
- Corporation Bank.
- National Housing Bank (NHB).
- LIC Housing Finance.
- Deewan Housing Finance Ltd. (DHFL).