ü The Ministry of Finance has notified the scheme called the Reverse Mortgage Scheme 2008 dt.30/9/08.
ü Clause (f) of Section 2 of the scheme defines Reverse Mortgage as mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution.
ü Simply put, Senior Citizens (above 60 years age) owning a house can mortgage it with a lender to receive a stream of income, especially in retirement, without selling their home.
ü Lender provides loan against the future realisable value of the home.
ü National Housing Bank (NHB) has already started to provide RLM.
ü The Senior citizen is not required to service the loan during his/her lifetime i.e. does not have to make monthly repayments of principal and interest to the lender.
ü Value of the house is dependent on the value of the house assessed by the lender, age of borrower and prevalent interest rates.
ü Loan can be provided through
o monthly/quarterly/half yearly/annual disbursement
o lump sum disbursement
o committed line of credit
o combination of all three
ü Maximum period of loan is 20 years.
ü Loan amount cannot be used for speculative, trading or business purposes.
ü Valuation of the property will be done at the frequency decided by the lender but at least once in 5 years.
ü Borrower continues to use the house
o through their lifetime; or
o until permanently moves out; or
o ceases to use it as permanent primary residence.
ü Loan carries a non-recourse guarantee i.e. borrower will never owe more than the net realisable value of the property, provided terms and conditions of the loan have been met.
ü On borrower’s death or his leaving the property permanently, the loan is repaid along with accumulated interest through sale of the property.
ü Borrower/his heirs have the option of repaying the loan (with interest) and have mortgaged released without resorting to sale of property.
ü Borrower/his heirs also have the option of prepaying the loan at any time during the loan tenor or later, without any prepayment penalty.
ü Newly inserted clause (xvi) in Section 47 of the Income Tax Act provides that any transfer in transaction of RML under a scheme made and notified by Central Govt. shall not be regarded as transfer.
ü Hence the possibility of the property being charged to Capital Gains Tax does not arise.
ü Section 10 of the Act has also been amended to provide that any loan received by an individual in a transaction of RML shall not be included total income of the borrower.
ü However, the borrower shall be liable to Capital Gains tax only at the point of alienation of the mortgaged property by the mortgagee for the purpose of recovering the loan.
ü Concept of RML is a blessing for the elderly.
ü Owned house property can be leveraged against regular cash inflows.
ü Those who did not plan in their early lives for their retirement can plan now.
ü An additional Financial Planning tool.