Reverse Mortgage: Sound financial planning

Post-retirement years can be hard on people who do not have adequate liquid funds to manage their expenses. Traditionally, Indians have held capital in the form of non-liquid assets like gold and property which cannot be used to meet the routine expenses. Keeping this in mind, the Government of India introduced the concept of Reverse Mortgage about a decade ago. Read on to know how this scheme could provide you with a steady flow of income.

What is Reverse Mortgage?

Reverse Mortgage is the exact opposite of a home loan. In this scheme, the permanent residence of the borrower is mortgaged in lieu of regular payments. The reverse mortgage scheme is a good bargain for those who are seeking money for meeting their daily expenses, medical emergency, home renovation or supplementing an existing source of income. The money received from this scheme cannot be used for speculative or business purposes.

It is offered by Primary Lending Institutions (PLI), Scheduled Banks and Housing Finance Companies registered with the National Housing Bank. Single individuals above the age of 60 years can apply for this scheme. Couples too can jointly apply under the condition that one of them must be of 60 years and the other partner should be at least 55 years.

The mortgage has certain rules and laws which encompass payments, the mortgaged home and loan repayment.

The rules associated with the home mortgaged:

The  banks have laid down a set of rules which the borrowers have to comply with while they opt for the mortgage scheme. The rules with respect to the home mortgaged are enumerated below:

  1. Only a self-acquired, non-commercial property which is the permanent place of residence of the borrower can be mortgaged. A gifted property or a let-out property cannot be mortgaged.  
  2. The property should be free of all encumbrances
  3. The borrower needs to ensure that the property is kept in a good condition.
  4. The home should be insured against natural calamities and the premium for the same must be paid regularly.
  5. The borrower must not falter in paying the taxes, electricity bills, water bills or any other statutory payment pertaining to the house.
  6. The home must have a residual life of 20 years.

Payments and Taxation:

The tenure of the loan is different for various institutions but it cannot exceed 20 years. After the lapse of the period, the borrower can continue to stay in the property but will not receive any payment and the interest on loan will continue to accrue till it is not repaid.

The borrower can receive the loan amount in the following ways:

1. Monthly, quarterly or half yearly payments subject to a cap of Rs. 50,000 per month.

2. Lump sum payment can be opted in case of medical emergencies and is restricted to 50% of the total loan amount. The lump sum payment is subject to a cap of Rs.15 Lakh and the rest of the amount would be eligible for periodic payments.

3. Committed line of credit.

Revaluation: The property would be revalued after a regular interval (not more than 5 years). If during that period the price of the property  goes up, the borrower can opt for a higher amount of loan. Likewise, there will be a decrease in the amount of loan extended if at the time of revaluation the value of the property goes down.

Loan payback: The loan amount becomes due and payable on the demise of the last surviving borrower or if the borrower switches residence. After the demise, the property would belong to the bank but the legal heirs can repay the loan with interest, to reclaim the property.

Taxation: No income tax is levied on the payments received as part of the scheme.

The response of the market:

Even though this scheme has been in the market for over a decade now, it has not been able to garner a strong positive response from the market. This could, perhaps, be due to both social and financial implications associated with it.

As far as the social aspect is concerned, many people may not be comfortable with the idea of leaving behind a loan for their children. Also, Indians tend to attach a great deal of emotional value to their houses, thus mortgaging a property as a concept may not gel well with their sentiments.As for the financial aspect of the mortgage, firstly; the money offered by the scheme is not sufficient to sustain a livelihood in an urban city. To add on to that,

the interest keeps building after the lapse of stipulated time and the borrower receives no benefit.

Keeping in mind the shortcomings of the Reverse Mortgage scheme, the government came up with an improved version of it – the Reverse Mortgage Loan enabled Annuity (RMLeA).

What is an RMLeA? How is it different from Reverse Mortgage Loan (RML)?

RMleA is an improvement over the Reverse Mortgage loan. While the rules and clauses of the RMLeA are almost the same as that of RML, the main advantage is that in RMLeA the borrower receives lifetime payments with an increased quantum of annuity.

A quick look at the differences between RML and RMLeA:

1. PaymentsThe borrower gets payments for a fixed tenure which is not more than 20 years.The borrower gets lifetime payments.
2. InstitutionsOffered by Primary Lending Institutions (PLI), Scheduled Banks and Housing Finance Companies registered with National Housing BankThe PLIs will source RMLeA on behalf of the borrower from Life Insurance Companies
3.Fixed paymentsThe loan offered may vary when the house is revalued periodically. Thus the payments received after revaluation may change depending on the market value of the house.The annuity received is fixed.
4. Service feesNo service charge is levied on the payments.Service fee is capped as 1.5% of the principal.
5.Prepayment of loanThe borrower has the option to prepay the loan. However, after prepayment the loan payment stops.The borrower can prepay the loan but the annuity payments will continue.

Initially the RMLeA payments were taxable but to increase the popularity of the scheme, the payments were later made non-taxable.

Keeping in mind the monetary needs of urban dwellers, the payments received under  RML and RMLeA may not be sufficient enough to be the sole means of income. For a greater pool of disposal income, it is advisable to club these payments with other sources of income.




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