We are all aware of mortgages. It is a house or another property used by borrowers as a security against any loan. A mortgage loan is a type of loan in which a bank sanctions an amount to the borrowers. The borrowers have to later repay the amount with interest to the banks. This repayment is done through monthly EMIs. In contrast to mortgage loans, a reverse mortgage is slightly different.
In this unique loan, individuals mortgage their property to the bank. The bank in return, pays the amount for the property every month. Since the bank pays the EMIs to the individuals every month, this scheme is called a reverse mortgage. Lets read about the reverse mortgage and its benefits for senior citizens.
Today after almost 20 years since the initiation of this loan, many are not aware of this facility. This content-rich article will boost the knowledge of the reverse mortgage and how it is a boon to the senior citizens of India.
The eligibility criteria, the necessary documents for submission, the salient features, merits, and demerits, the procedure for availing this scheme, the fees involved, and the tax liabilities; These are some of the aspects that will be discussed through this article. This article will conclude with some frequently asked questions.
What Is A Reverse Mortgage?
A reverse mortgage is a loan that can be availed only by the senior citizens. This loan involves mortgaging of the applicants’ house or any property. In return, the banks provide the loan amount to the borrowers on a monthly basis.
The loan amount is determined by the bank. This amount is usually 60% of the original property value. After the maturity of this policy, the applicants can still reside in the house. Once the applicants cease to exist, then either the bank takes over the property or its legal heirs can retain it by repaying the entire loan amount.
A reverse mortgage is complementary to a home loan where the borrowers have to pay the EMIs to the lender. This policy has its own merits and demerits. If used effectively, then this can prove to be the greatest asset to the senior citizens. Or else the children will have to pay the brunt of this policy. Let’s learn more about this policy.
Eligibility Criteria For Reverse Mortgage
Every applicant has to fulfill the conditions to be eligible to apply for this policy.
- The individual should be above 60 years of age. If both the partners intend to apply for the reverse mortgage, then either of the two has been above 60 years old. The spouse could be above 55 years old. Some banks may set the age limit of the other partner to 58 years.
- The applicant should own a house or any other property. For couples, any one of the two should own a house.
- The property should be existing for at least 20 years.
- The applicants should be permanent residents of the property to be mortgaged.
- The property should originally belong to the applicant. It should neither be inherited nor donated by a third party.
- The property should not be used for commercial purposes.
Necessary Documentation To Avail The Facility Of Reverse Mortgage
Here’s a list of documents that are to be necessarily submitted to avail of this policy.
- The KYC documents like Aadhar card, Permanent Account Number (PAN) card, etc.
- Registered will of the house which mentions the applicant as the owner of the property.
- List of legal heirs.
- Property details like home insurance papers, land-use certificates, etc.
Features Of Reverse Mortgage
The different features and characteristics of the Reverse Mortgage are:
- The monthly amount received by the borrowers through this policy is not taxed. This is because it is considered a loan.
- The minimum loan amount that can be sanctioned by the bank is Rs.3 lakh.
- If the amount received from the bank is used to repair or renovate the house, then this amount will be deducted from the overall amount received by the borrowers.
- After the maturity of this loan, the total amount to be repaid will be deducted.
- The maximum loan amount provided against the mortgaged property is 60% of the total value of the property. This should not exceed Rs.1 crore.
- The minimum duration of this loan is not less than 10 years. However, the maximum tenure is determined by every bank.
- The mode of payment is not restricted to every month. These credits also are made quarterly, half-yearly, and annually.
- After every 5 years, the property will be evaluated by the bank.
- There are no hidden charges involved in a reverse mortgage. The pre-payment penalty is not applicable. The interest rates charged are low. The processing fees are also low.
Benefits Of Reverse Mortgage For Senior Citizens
1. Improves The Financial Stability Of Senior Citizens
The amount received serves as an additional income to the retired personnel. The funding received belongs to the borrower which substantially improves his financial status. This helps them to become self-dependent and enables them to take care of their own needs.
2. Flexibility In Use
The amount received by the applicant periodically can be used anytime and anywhere. Thereby not restricting any purposes and using the amount unlimited. It can enable senior citizens to manage their expenses.
3. There Is No Default Risk Involved
When the property is mortgage, there is no need for the applicant to vacate the property. Instead, they can live there or use the property as long as they are alive. The bank will take over the property only after the death of the applicant.
4. Feasibility In Repayment
When the applicant wishes to reclaim the mortgaged house or property, he will only have to repay the market value of the property. This value is independent of the loan amount sanctioned. The repayment is not necessarily done monthly or during the tenure. It can be settled after closing the scheme.
5. Prepayment Is Easy
The prepayment of this loan does not involve any additional charges. Thus, prepayment can be done anytime. In this manner, the borrowers will not be charged any additional fees.
How does a reverse mortgage benefit the senior citizens in Indian?
The reverse mortgage provides a stable income to the senior citizens. This scheme is the opposite of a home loan. The borrower in a reverse mortgage will receive the periodic installments for the property. This scheme can also prove to be beneficial to the legal heirs of the senior citizens. Let us look into the details of this policy with an example.
Consider Mr. and Mrs. Naik are residing in a huge house worth Rs.1 crore. They are 63 and 59 years old, respectively. Their children are well-settled in abroad. But Mr. Naik is not quite happy with the monthly pension amount that he receives. So, he decides to increase his monthly income by availing of a reverse mortgage. After consulting the bank, it approves of a loan worth Rs.75 lakh.
Since the tenure is 15 years the monthly amount that he will receive is Rs.42,000. Now after 15 years when Mr. Naik turns 78, he passes away. But Mrs. Naik can still live in the same house as long as she can. A few years later Mrs. Naik also passes away. Now the tenure of the loan has surpassed 15 years. And the current amount of the property is Rs.1 crore.
This property now has to be transferred to the legal heirs that are the children of Mr. and Mrs. Naik. The children now have two options. They can either repay the entire loan amount to the bank or sell off the property. The current value of the property that is 20 years later will be Rs.2.5 crores. The children can sell the property and repay the mortgage loan amount of Rs.1 crore. Thereby, leaving them with a profit of Rs.1.5 crore.
In case the applicants do not have any children then the bank will take over the house. They may sell it, and make a profit for themselves.
Fees Charged For Reverse Mortgage
|Loan processing charges.||1% of the loan amount or Rs.10,000 whichever is higher. These charges are collected during the application of this policy. They are not refundable.|
|Premature closure charges.||Nil.|
|Duplicate No Objection Certificate||Rs.500|
|Stamp duty||These charges are fixed by the state.|
|Cheque bounce charges||Rs.500 per instance.|
|Cheque swapping charges||Rs.500 per instance.|
|Duplicate statement issuance charges||Rs.250 per instance.|
|Issuance charges for the photocopy of Title deeds||Rs.250 per document set.|
|Credit report issuance charges||Rs.50.|
|Switching fees (from a higher floating rate to lower floating rate)||0.5% of the principal amount with a minimum of Rs.10,000.|
Tax Liabilities Involved In Reverse Mortgage
A reverse mortgage enables the borrowers to earned an additional source of income. This is done by mortgaging their property. The payments can either be received periodically or the borrower can opt for the lump-sum payment of the entire loan.
As per Section 47(16) of the Income-tax Act, the income received by the borrower form the banks under this scheme is not taxed. Since a reverse mortgage is considered as a transfer the borrowers are not liable for any taxes.
Under Section 10(43) of the Income Tax Act, it is mentioned that if the borrowers receive the amount in a lump sum or on periodic intervals, then it is exempted from tax.
Also, if the borrowers or the legal heirs decide to keep the property by paying off the loan amount, then the repayment of the loan amount is exempted from tax.
Sometimes, some borrowers may request the lenders to transfer the entire loan amount to a life insurance company. The insurance company then pays the borrowers periodically. This is called an annuity. The amount and the tenure of the annuity are decided by the borrower. Now, in this case, the annuity received is treated as income from other sources. Thus, the annuity is taxable.
Thus, annuities are liable for taxes however, the direct payment from the banks is exempted from tax. But through annuities, the borrowers can receive payment for a lifetime, which is not possible in the latter case.
Demerits Of Reverse Mortgage
- The payment received by the borrowers’ is fixed. This cannot be increased during the entire term of the policy.
- The documentation process is tedious. It should be maintained in the proper order to avail of this scheme.
- If the borrower is unable to repay the entire loan amount, then he loses the ownership rights over the property. The property will be taken over by the bank and sold for profit.
- The interest generated through this scheme is large. If the interest rates vary over the entire duration of the loan then it will be difficult to manage the loan.
- In the case of an annuity, if the borrowers do not pay their taxes in time then, they may have to repay the reverse mortgage loan before time.
Frequently Asked Questions
1. What is a reverse mortgage?
A reverse mortgage is a unique loan. It enables individuals above 60 years to mortgage their property to avail of this loan. The loan amount will be paid to the borrowers periodically. This frequency of payment is determined by the borrowers.
2. What is the difference between a reverse mortgage and a regular loan?
In a regular loan, a lump sum is sanctioned to the borrowers. The repayment of the lump sum attracts a high-interest rate. The repayment of this loan should be done in monthly installments by the borrowers. Whereas in a reverse mortgage the borrower mortgages his property in return for monthly payment by the bank. After the maturity of this loan, the borrowers can still reside in the property till his death.
3. Will my house qualify for a reverse mortgage?
The house will qualify for a reverse mortgage only under the following circumstances:
I. It should be self-acquired by the applicant. It should neither be inherited nor gifted by someone else.
ii. The house should be existing for over 20 years.
4. Will a person with an existing mortgage qualify?
Yes, this may be possible only if the applicant still owns the money on the existing mortgage. The applicant can even pay off any pending mortgage loans by the amount he receives from the current reverse mortgage.
5. What are the payment options for a reverse mortgage?
The borrowers can either avail of period payment of the loan amount or as a lump sum. The periodic payment can be done monthly, quarterly, half-yearly, or annually.
6. Is the partial prepayment to the reverse mortgage acceptable?
Yes, the prepayment of this loan is accepted and it is free of any external charges.
7. Are taxes applicable on the amount received from the bank?
No, the amount received from the bank is exempted from taxes.
8. What is the minimum and the maximum amount that a borrower is likely to receive from a reverse mortgage?
The amount sanctioned by the bank is 60% of the market value of the property. The amount ranges from a few lakhs approximately 3 lakhs to a maximum of 1 crore.
9. What is the tenure for a reverse mortgage?
The duration is determined by the banks. Thus, it varies from bank to bank. But the minimum tenure should not be less than 10 years.
10. Will the periodic payment from the bank increase with the increase in property value?
No, the payment from the bank is fixed for the entire duration of the policy. However, after attaining maturity the borrowers can sell the property at market value, repay the loan amount to the bank, and keep the difference for themselves.
11. Can a person without any legal heir apply for this policy?
Yes, a person having no children can also apply for a reverse mortgage.
12. What will happen to the property if the person does not have any children?
After the maturity of the policy, the ownership rights will be transferred to the bank. The borrower can either claim the property back by repaying the loan. Or else he can let the bank have the ownership right. After the death of this individual, the bank will take over the property. They will sell it and keep the profit for themselves.
Many times, senior citizens may not like the idea of being dependent on their children. Or sometimes the children may be too young to support the parents. When such circumstances arise, a reverse mortgage can benefit families. This is done by enhancing the monthly income. The reverse mortgage is a unique way to guarantee regular funds to senior citizens. It definitely has benefits for senior citizens.
As retired individuals, they may run short of cash due to daily expenses. If these individuals have a fully owned property then they can mortgage it. Thus, this scheme can financially enhance the income levels of the retired personnel. If managed properly then this scheme can also prove to be fruitful for the legal heirs of the applicants. This is one of the best schemes that every senior citizen can avail of to increase the periodic generation of income.