Reverse Mortgage Loan (RML)

Introduction

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.

Basic Features

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.

Taxation

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.

Conclusion

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.