Should you opt for Reverse Mortgage or not?

India’s grey population is on a rise and as per the current estimates, India is a home to 100 million elderly people. With the intention to address the financial concerns of the elderly, the Government of India had introduced the reverse mortgage scheme in its budget for the financial year 2007-2008. Here we try to unearth some of the vital facts about the relevance of the reverse mortgage in India.

What  is the reverse mortgage scheme?

The reverse mortgage functions inversely to the regular home mortgage system. In the reverse mortgage, the property owner enjoys the privilege to continue to live in his own home until his or spouse’s lifetime, while accepting a specified amount for the specified term against the property. However, his ownership gets transferred to the bank on his or spouse’s demise, whichever is later.

Features of the reverse mortgage

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The property should have been self-acquired and should be free from encumbrances. Also, the house should be self-occupied.
• The maximum loan is up to 60 per cent of the value of the residential property.
• The maximum tenure is 20 years however few banks have capped it to 15 years also.
•  The borrower can opt for a part remittance in a lump sum which could not exceed Rs. 15 Lakh and the rest in monthly, quarterly or annual payments where monthly payments could not exceed Rs. 50000 each month.
• The bank would take over the property only after borrower’s death
• Currently, the maximum loan amount is capped to Rs. 1 Crore.

Taxation Aspect

Under section 10 (43) of the Income Tax Act, in the reverse mortgage, the money received by the owner of the property, whether in lump sum or annuity is tax exempt. However, provisions of capital gains tax will apply if the property is disposed off by the bank, the borrower or his/her legal heirs. In case, the legal heirs want to take only the repossession of the property by paying off the  outstanding dues to the bank then tax liability will not arise.

Viability of Reverse Mortgage in India

The reverse mortgage scheme has failed to cheer up the elderly crowd in India due to many factors. In the first place, the maximum cap of Rs.1 Crore on loan amount hardly appeals to the urban population due to soaring real estate prices in urban areas as well as ever increasing cost of living in these places.

Secondly, the life expectancy on an average has increased and therefore the tenure of 20 years and in many cases, 15 years, puts the borrower on risk if he outlives the annuity period. Thus, the annuity payments from the reverse mortgage appears to be insufficient particularly when the medical needs grow at this phase. Apart from this, in spite of clear guidelines from the Central Bank of India, the aging crowd shy away from this scheme due to the cumbersome legal and compliance process of the banks.

After seeing the failure of the scheme in India, the RBI is in consideration of launching a combination mortgage product of the home and reverse mortgage loan, the success which appears to be bleak.

Conclusion

The reverse mortgage can be a viable option for those who do not have legal heirs which can put them in a fix otherwise. The legal heirs might even lose the right over the property if they are unable to settle the scores with the bank. However, it is advisable to sell the property as it will fetch sufficient amount compared to that of a reverse mortgage. Also, from the sale proceeds, one can consider relocating to a smaller town or buying a less-expensive home and invest the residual amount to provide for monthly income.