All about reverse mortgage loans

[ecis2016.org] Here’s everything you need to know about reverse mortgage loans (RML) and why this financial product is not popular in India yet

Life after retirement could be harsh for senior citizens, especially if they have no pension money or other savings, to meet their daily expenses. However, asset-rich but cash-poor elderly have a way out of this monetary stress – by pledging their property to receive cash regularly, a concept known as reverse mortgage loan (RML) in housing finance.

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What is a reverse mortgage loan (RML)?

Understanding the RML concept becomes easy, if you understand the concept of a home loan and the way it works. In case of a home loan, you borrow capital from a financial institution to buy a house and pay a regular EMI in exchange for the loan, along with interest. In a reverse mortgage, you pledge a property of your own with the bank, to receive cash. In a home loan, you pay the bank to gain ownership over the property. In a reverse mortgage loan, the bank pays you a certain portion of your property’s market value, because of your ownership over a property.

This product, which is quite popular in the West, has been designed, keeping in mind the financial needs of the elderly population, who, in spite of owning assets, are often cash-starved as sources of cash generation run dry in that particular phase of life.

[ecis2016.org] What are reverse mortgage loan schemes

Reverse mortgage scheme in India

Let us look at the basic principles, on which such loans are provided in India.

Eligibility criteria for reverse mortgage

Age of the borrower

Reverse mortgage loans are typically meant for people aged 60 years or more. Married couples could be joint applicants, provided one of them is at least 60 years old. While different banks have varying norms regarding the co-applicants’ age, they do not allow a joint borrower whose age is less than 55 years.

Age/condition/type of property

Those with dilapidated structures might find it difficult to get a RML, since banks typically offer loans against properties that have at least two decades of residual lifespan.

In India, banks allow RML on self-occupied residential properties. Some banks also allow this on commercial properties. Also, a property with an outstanding loan cannot be considered for reverse mortgage, until the entire loan has been repaid.

What can a reverse mortgage loan be used for?

A reverse mortgage loan can be applied only for:

• Upgradation, renovation, extension, improvement or maintenance of property.
• To insure property.
• For medical emergencies.
• To supplement pension/other sources of income.

The loan is not meant for speculative activities.

Loan tenure under reverse mortgage

Once you apply for a RML, the bank will carry out a technical valuation of the property, to arrive at its market value, based on its current condition and prevalent housing prices. After this, the bank would typically lend you 60% of the property value, either as a lump-sum amount or through periodic payments, or in a combination of both. In case of periodic payment, known as reverse EMIs, a tenure not exceeding 20 years is fixed. The borrower does not necessarily have to repay the loan at the end of the loan tenure.

How much loan can I get under reverse mortgage?

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As mentioned earlier, 60% of the current market value of the property is typically granted as loan. In terms of amount, it could vary from Rs 5 lakhs to Rs 2 crores, depending on a variety of factors.

Another determinant of the loan amount is the principle that at no point would the bank allow the equity of the borrower to fall below 10% in the property. This means a borrower, whose property is worth Rs 1 crore, cannot get a RML higher than Rs 90 lakhs.

Also, the loan amount will be less if the tenure is long, while the amount could be higher in case of a short tenure.

Can reverse mortgage loan be used to buy annuity?

Reverse mortgage schemes can also be used for buying an annuity from a life insurance company. In this arrangement, the borrower requests the lender to hand over the loan amount to the life insurance company. The insurer then makes periodical payments to the borrower. This payment is known as annuity and is taxable under the current laws.

Income tax on reverse mortgage loan

Section 47 (16) of the Income Tax (IT) Act, 1961, states that the act of mortgaging a property for reverse mortgage, will not be treated as a transfer, as no property transfer has taken place and as such, reverse mortgages do not attract any capital gains tax liability. Monthly, as well as lump-sum payments, received from the bank are thus exempt. However, the annuity remains taxable, if the borrower has purchased an annuity from a life insurance company.

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Property rights under reverse mortgage

In exchange for the cash payments, the owner will have to pledge the rights to his home, to the lender. This does not mean that the property title is held by the bank. The borrower continues to be the owner of the property. However, the borrower’s equity in the property declines over the loan tenure, in case of reverse mortgage.

Property usage under reverse mortgage

Under this arrangement, the borrower can continue to stay in the same house, throughout their life. In fact, many lenders consider only the permanent primary residence of the borrower, to provide the loan. Their spouses can also live in the property, in case the principal borrower dies. While the borrower gets to reside in the house, they are responsible for payment of related dues, including municipal tax, utility bills, etc.

Interest on reverse mortgage loans

A fixed interest is charged on the borrowed capital and at the time of the final settlement, the borrower or his heirs could be liable to repay the accumulated liability, if they want to reclaim the property. The scheme involves payment of various other changes, including processing fee and stamp duty.

Reverse mortgage loan repayment

Under reverse mortgage, all loan and interest repayment liability arises, when loan amount matures. This could happen in the following circumstances:

• At the completion of the tenure, even if the borrower is alive.
• If the borrower passes away.
• In case of default on property tax, or insurance, or utility payments, or breach of the terms and conditions of the contract.
• If the property is sold.

Reverse mortgage loan recovery

In a reverse mortgage, a borrower can repay the mortgage midway, by paying the amount along with the interest and other bank charges.

Typically, the lender recovers the loan after the death of the last surviving borrower, or when they leave the property. At the end of the tenure, the borrower or his legal heirs could either repay the loan or the bank can sell the property to recover the money. However, the lender’s rights take precedence over those of the borrower.

If the borrower or his legal heirs decide not to sell the property and pay the dues, no tax implication will arise at all in future, as well.

Example

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Suppose Sunil Sharma, 61, owns a house worth Rs 80 lakhs. With a loan-to-value ratio of 60%, he is eligible for a reverse mortgage loan of Rs 48 lakhs. Considering an interest rate of 9% for a 15-year tenure, Sharma will receive a monthly payout of Rs 48,685. In case of a 10 year tenure, the payout will be Rs 60,804 every month.

Documents to be submitted with RML form

• Copy of PAN card.
• Copies of property document.
• Copy of your registered Will.
• List of legal heirs.

Why are reverse mortgage schemes not popular?

Even though the government introduced this product in India in 2008, the product has failed to attract senior citizens in these 12 years. This is owing to various factors, with sentimental values attached to asset ownership in India being the prime reason. Indians view immovable assets, especially residential properties, as something that has to pass on from one generation to another. Consequently, they will try all other options to generate cash and only pledge their properties when all else fails. Indian lenders have also failed to fully consider this aspect, while offering products that merely replicate the classic reverse mortgage product.

Moreover, under the scheme, the monthly amount that a senior citizen can get is capped at Rs 50,000. Also, the applicant can get a lump-sum payment of 50% of the eligible amount based on the value of the property, or Rs 15 lakhs, whichever is lower.

There are also restrictions over the usage of the loan money. In India, the lump-sum so withdrawn through reverse mortgage can only be used for medical treatment of the senior citizen, their spouse and dependent. The money could also be used for renovation of the property, or repayment of loan taken for the same property.

The tax liability on the annuity received from the insurance company, is also a deterrent.

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Benefits of reverse mortgage

• You continue to hold the tile to the property.
• No payment obligation throughout your lifetime.
• No tax liability on the amount received.

Disadvantages of reverse mortgage

• There are limitations on the amount you can receive, as well as its usage.
• Tenure cannot exceed 20 years.
• More expensive than home loans.
• Payouts cannot be increased in case of an emergency.
• Scope for scams and wrongdoings.
• Complex scheme for senior citizens.

Reverse mortgage providers in India

Among the leading banks that offer RML in India are SBI, HDFC Bank, Bank of Baroda, Axis Bank, United Bank of India, IDBI Bank, etc.

Charges on reverse mortgage loans

Interest: Interest rates on RMLs currently range between 8.50% and 9%. At SBI, these loans are currently priced at 8.45%-9.45% per annum.

Processing fee: The borrower may have to pay nearly 1% of the borrowed amount as processing fee. Some banks also have a flat processing fee.

At SBI, for example, you have to pay a processing fee of 0.50% of the loan amount, with the lower and upper cap of Rs 2,000 and Rs 20,000, plus applicable taxes. You also have to pay a stamp duty on the loan agreement and mortgage, along with GST.

Prepayment fee: If the loan is transferred to another lender, the borrower will have to pay 2% of the loan amount as penalty.

What can make RML popular in India?

At a time when life expectancy in India has now touched 70 years, these schemes have kept 60 years as the minimum age for the applicant. These schemes have higher chances of finding takers if the age bracket is reduced to at least 50 years. Another factor that acts against RML is that the borrower must occupy the property and cannot rent it out. In their old age, the elderly do not need large houses all for themselves and should, thus, be allowed to rent portions of their property to make these schemes popular. It would also help, if the loan tenure is the borrower’s lifetime rather than a fixed number of years.

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