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Brief insights on concept of Reverse mortgage in India

Admin

CA Garima Mittal
Introduction
Reverse mortgage as its name implies is the reverse of a traditional mortgage
such as home loan. In case of traditional mortgage, lump sum amount is
borrowed to purchase or refinance home, then we pay it back in monthly
instalments. However, reverse mortgage is just an opposite, lender pays you. Reverse
mortgage is a special type of home equity financing, i.e., it is a special type of loan
against home that allows the borrower to convert a portion of equity in the property into
cash. In simpler words, in reverse mortgage, those senior citizens who are owner of
self-occupied property can mortgage it to financial institution in order to earn a regular
income from them at a defined rate of interest.
Reverse mortgage is considered a golden walking stick for those senior citizens who are
having limited income, generally pension or lacks regular income and lack financial
support from children. Reverse mortgage was introduced in 2007 by Union Government
in India. Reverse mortgage concept is very popular in Western countries like in United
States (US), though it is less effective in India. In India, it is less effective due to its two
reasons, firstly due to lack of awareness, since its a new concept launched just 9 years
back and not in the highlights of common man and secondly, due to its criticism which is
described in detail in below section.
Some Important facts:
Though while explaining the concept, most the pre-requisites covered already, however, it
is always better to have it in one go for easy avail of reverse mortgage scheme. Please
note that below are pre-requisites & salient features for availing reverse mortgage in
India.
Indian citizen above 60 years
Owns self-acquired and self-occupied residential property in India
Married couples would be eligible as joint borrowers for financial assistance. In
such a case, the age criteria for the couple would be at discretion of the lending

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institution, subject to at least one of them being above 60 years of age.

Property should be free from any encumbrances.
The life of the property should be minimum 20 years
Maximum loan amount would be generally up to 60% of value of residential
property. Though the maximum amount could differ depending upon the bank
policy.
Maximum tenure of the mortgage is 15 years and minimum is 10 years. Some
banks are now offering up to 20 years.
Option of monthly, quarterly, annual or lump sum loan payment
Property revaluation to be undertaken by the lender at periodic intervals.
The value of loan is based on several factors like borrowers age, value of property,
current interest rates and specific plan chosen. Borrowers age and value of home
combined is directly proportional to income, i.e., higher the borrowers age and higher the
value of property, the more money is available.
For availing reverse mortgage, submission of basic documents is necessary like PAN, list
of legal heir and copy of registered will. Details like cost and area of the property to be
mortgaged also required.
Benefits of Reverse Mortgage:
Tax free-income supplements, retained ownership, no repayments, freedom and flexibility
are some important benefits of reverse mortgage. Reverse mortgage is very lucrative
especially since it can be used for reducing dependency and to meet the medical and
other costs & to meet basic amenities, problems of which are generally associated more
with older age in the light of limited income (i.e. pension) or no income.
Criticism in India
Though reverse mortgage is considered a source of survival for senior citizen, but some
also called it a last resort.
Reverse mortgage is having lengthy documentation process; senior citizen may consider
it tedious. Further, some others factors like residential property cant be rented out fully
or partially discourages the people to take up this scheme. Further, if the borrower
outlives the loan tenure, he/she can continue to live in the house, but living without this
monthly income would be difficult. Payouts also cant be increased in case of emergency.

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For removing that scenario, you have to take insurance which will increase your cost,
i.e., premium. Further, there are some psychological factors also, for example, there are
lot of emotions attached to family property due to which people resist in using this
scheme.
Taxation Viewpoint
Under reverse mortgage scheme, there are two generally trigger points where taxability
can arise in this scheme other than settlement period if reading the context in flow, firstly
in case of transfer of capital asset and secondly, when having receipt of income, hence,
Finance Minister inserted the specific clauses mentioned below in the Income Tax Act,
1961 in order to make this scheme tax free for the sake of senior citizen.
Since the intention of reverse mortgage is to secure a stream of cash flow against the
mortgage of a residential property and not to alienate the property, hence Finance
minister in Union Budget 2007-08 inserted a new clause (xvi) in section 47 of Income Tax
Act, 1961 to provide that any transfer of a capital asset in transaction of reverse
mortgage under a scheme made and notified by Central Government shall not be
considered as a transfer. W ith respect to receipt of loan, 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 instalment, in a transaction of reverse mortgage referred to
in section 47(xvi) of the Act shall not be included in income.
Hence, taxability under reverse mortgage will arise only at the point of alienation of
mortgage property for the purpose of recovering the loan.
Conclusion
Reverse mortgage is rather unconventional retirement tool. It is a boon for the asset rich
and income poor population. However, its acceptance has been very cautious even in
countries where it has been around for quite a while.
(For queries, author can be reached at

11-Jul-16 11:15 AM