Reverse Mortgage – Make the most of your house property

Reverse Mortgage: Get more from your house

As we all grow older, our incomes shrink to our pensions, medical expenditures rise while capacity to work dwindles. If you also account for today’s current inflation scenario, it’s hard to imagine a comfortable life after retirement with limited cash flows.

But there is one way out of this situation. You can leverage your most prized possession “Your Home”, which you thought was ill-liquid. Introduced in 2007, the “Reverse Mortgage” is a loan product under which senior citizens can pledge their owned property with the bank and in turn bank makes you regular payments, typically in EMI form till the death of the borrower or spouse. Essentially, the scheme is just opposite of normal mortgage schemes.

Reverse Mortgage: The options & eligibility

Today, most domestic banks/NBFCs offer reverse mortgage scheme. As per RBI Guidelines, all senior citizens above 60 years of age and in possession of self-occupied house property are eligible under the scheme. In case of spouse, he/she must be 55 years of age. The actual loan amount disbursed will depend upon the age of the borrower(s), the valuation of the property, prevailing interest costs and other related costs. In practice, most banks provide loans of up to Rs 1 Crore, which tends to be 50-60% of the total market value of the house. As per RBI norms, maximum that banks can offer is 60%. Also, the maximum tenure for most banks ranges from 10-15 years. The following are the sample set of few banks offering reverse mortgage scheme:

Reverse Mortgage Schemes: A Comparison

Source: Rupeetalk Research

Besides, above mentioned there are few others condition imposed by RBI, such as property should be clear of any charge, the life the property should be minimum of 20 years, throughout the loan tenure property must be self-occupied, a mandatory re-valuation of the house after a fixed duration, typically 5 years and loan amount can be used for any purposes, except for speculation purposes.

The beauty of the ‘reverse mortgages' scheme offer is that the borrower as well as spouse can stay in the house throughout his/her life, while enjoying the money from the bank. On death or leaving the house permanently, the loan along with the accumulated interest is repaid through the sale of the property. It’s either on death or leaving the property permanently, the re-payment of loan gets triggered, which is typically, through the sale of the property.  Here again, the property is appraised and difference (if any) of appraised value to the loan outstanding amount, is given back to the legal heir. In rare case of loan outstanding balance along with interest thereon is larger than the value of the mortgaged property, the loan is capped at the value of the home equity only and the loss is borne by the lender.

The borrower also has an option to pre-pay the loan at any time during the loan tenure, without any pre-payment penalty. The similar option is available to the legal heir, if borrower dies. He can repay the loan and interest thereon and get the property released. 

Different receiving options:

A reverse mortgage can have customized services including benefit receiving options for borrowers. The most widely known option is to get a fixed annuity on a monthly basis taking care of your monthly bills. Under the option, annuities can be structured in 2 ways; either the EMIs can be calculated taking into account of the owner’s life, based on projections involving health and average life expectancy, or structure EMIs for a specific time frame, e.g. 5 years. A fixed EMI option is most beneficial for those senior citizens, not covered by any health or pension plan and need fixed income to continue their living style in tune with pre-retirement days.

Another option includes creation of a line of credit, meaning making payments when requested by borrowers. This approach is suitable to borrowers with less strain on monthly finance and who want to save money for specific purpose, e.g. medical purpose. It provides them the comfort of having money ready should an emergency arise.

Another option, though, not followed by many is to get the entire balance of the loan in one lump sum. However, the approach can be very handy for senior citizens completely secure with finances who want to utilize these funds for specific goals. E.g. one can invest the money into such instruments earning more than what is charged by mortgage firm. Also, the returns are maximized by using the interest to generate some other income.

Taxability of Reverse Mortgage

Reverse Mortgage does not fall under the definition of transfer of a capital asset in Income Tax Act, and hence is not subject to any capital gain tax. The borrower, shall, however, be liable to pay capital gain tax when the property is sold for the purposes of recovering the loan. During the tenure, the amount received by a borrower is a liability and not income. But, wherever, the transfer is insured with an insurance company, the EMIs/lump sum received is taxed as income. For banks, the interest payable by the borrower is treated as accrued interest and hence taxable in the hands of the bank.

Conclusion

Reverse mortgage is a handy option if either you don’t have any dependents to pass on the legacy, or they are well settled and don’t intends to leverage your property. Further, the option can be used to live a comfortable life after your retirement, as well as to make further investments, if able to save anything. The flexibility of choosing amongst various receiving options adds to the benefits.