Reverse Mortgage Scheme for Senior Citizens: An overview

Majority of the retired individuals in India depend upon interest income from FDR, Senior Citizen Savings Scheme (SCSS), etc for their post-retirement expenses. However, lower interest rates, higher healthcare expenses, rising inflation have made it difficult for the senior citizens to balance-out the thing. There are instances wherein the parents are facing a financial crunch as a major part of the savings is spent on the education of their children who later on got settled abroad. As a result, a lot of senior citizens find themselves in a severe financial crunch. Regular & constant flow of income after retirement is a luxury which not all are able to enjoy.

The Reverse Mortgage Scheme (RMS) was designed in 2007 with an aim to provide regular funds to cash-strapped senior citizens who own a house property. What is reverse mortgage, how does it operate, what are the tax implications, let us know about it:

All about Reverse Mortgage Scheme:

A reverse mortgage is a loan product specifically designed to help the senior citizens of 60 years and more to use their self-occupied residential property as collateral so that they can receive regular monthly income over a specific period of time.
Reverse Mortgage is exactly opposite to that of a normal mortgage loan wherein any senior citizens can mortgage their property to a bank so as receive regular pre-decided periodic payments or even lump-sum amount. In a normal loan product, the borrower pays the monthly installment (EMI) to the bank whereas in reverse mortgage, it’s the bank who pays the regular installment (EMI) to the borrower over a specified tenure.
In reverse mortgages, the borrower is not required to vacate their house, neither during the tenure of the loan nor after the completion of the tenure. Borrowers can continue to stay for the rest of their life even after the completion of the loan tenure.
The residential house must be in the name of the borrower individually or it can be in joint name with the spouse. The scheme is not available to senior citizens who live in rented accommodation & don’t own a house property.
Reverse mortgage comes with a long tenure which may be in the range of 10 years to 20 years depending upon the choice of the senior citizen.
Interest rate on reverse mortgage loan is normally 2% to 3% higher than the normal housing loan interest.
The property mortgaged should have a balanced life of at least 20 years.
The monthly amount that can be availed by the senior citizen would depend upon the (a) Value of the property (b) Tenure of the loan (c) Requirements of the senior citizen. In the case of reverse mortgage, banks normally revalue the property after every 5 years. Hence, if the value of the property increases over time, borrowers can increase the loan value and avail a higher lump sum amount.
The bank will finalize the loan amount based on the condition and value of the house. Normally, the maximum loan sanctioned is in the range of 60% to 80% of the value of the property. So, if a house property is worth ₹1 crore then the loan amount can be up to a maximum of ₹ 80 lakh. The monthly installment payable by the bank is arrived at in such a way that the total outstanding at the end of the loan tenure with interest will aggregate to the loan amount sanctioned. For example, a person has availed the loan amount of Rs. 80 Lakh for a term of 15 years at an interest rate of 10%. In this case, the bank would disburse the monthly amount of Rs. 19,142/- to the person. The amount of Rs. 19,142/- disbursed periodically for 180 months with interest rate of 10% p.a. would turn out to be Rs. 80 Lakh at the end of 15^th year. The periodic payments, also known as reverse EMI, are received by the borrower over the fixed loan tenure.
At the end of the loan tenure, the periodic payment would stop & the senior citizen need not repay the loan & can continue to stay in the residential property. The bank will only assume ownership of the property in case person dies. The bank can relieve the mortgage if the person decides to repay the loan from the sale proceeds of the property at any time.
There are no restrictions on the use of the money received from this loan. The payouts received from the bank can be used for various purposes including renovation/extension of the property, to cover living expenses and medical costs, etc.
Reverse mortgages help senior citizens become financially independent and they do not have to rely on their children for financial support.The borrower can use the fund for any purpose and there are no restrictions or end use monitoring.

Repayment of Reverse Mortgage Loan:

The repayment becomes due after the last survivor dies. The legal heir of the borrowers is given the option to settle the loan by paying the due amount along with accumulated interest. However, if the nominee cannot repay the loan, the bank recovers the amount by sale proceeds of the property.

The extra amount after selling the property and settling the loan is paid to the legal heir of the borrower. If the sale proceeds are lower than the accrued principal plus interest amount, the bank bears the loss.

Tax benefits

Amount obtained through a reverse mortgage is not chargeable to tax under the Income Tax Act, 1961. However, a capital gain tax will be charged at the time of alienating the mortgaged property in order to repay the loan.

Conclusion:

There is no social security mechanism which is prevalent in India. One of the major concerns of post-retirement life is the lack of regular income. Having a steady flow of income is the need of the hour for senior citizens. With the help of a reverse mortgage, senior citizens across the country can take care of their day-to-day expenses and live a financially independent life by mortgaging their property.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]

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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road
Nagpur-440008.

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