The Hindu Business Line : Reverse mortgage: A boon for the elderly

The Finance Minister, in his Budget speech, mooted the concept of reverse mortgage for the elderly. To quote from the document's Paragraph 89: "The National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a `reverse mortgage' under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house through out his/her life time without repayment or servicing of the loan".

How the scheme works

In UK, the scheme is available to the persons aged 62 years or more. A similar age limit may be fixed here too. In the scheme, being conceptualised, a senior citizen of 62 years or more, who owns a house, can be given loan up to a fixed amount worked out on the percentage basis of the market value of the house owned and given on mortgage. They can, if they so desire, opt for receiving the amount in monthly instalments also. In such a case, the amount admissible will be spread over in 15 years in the form of annuity. The scheme can be implemented as shown in the Table, in regard to a house of the value of Rs 1 crore.

There can be variations in the flat scheme suggested earlier. A borrower can take lump-sum amounts (with a reduced number of instalments) for such emergencies as medical treatment, marriage in the family, education of children/grand-children, and so in. However, the loan amount will not be given for making investments. The scheme is also expected to have a provision for revaluation of the property after a period of five years, on the basis of which, there could be a revaluation of the loan/instalment amounts.

In the scheme proposed by NHB, the spouses will be the joint borrowers. In the event of the death of the owner, the spouse will be entitled to continue to live in the house and get monthly payment (if so opted) till he/she continues to live.

If a borrower survives beyond 15 years, he would stop getting monthly payments, but will continue to live in the house till he dies. The maintenance of the house will be the responsibility of the owner. The loan would become due and payable only when the last surviving owner dies.

The settlement of loan disbursed, along-with accumulated interest (expected to be at 10 per cent p.a.) will be met from the proceeds of sale of the house. If the heirs of the borrowers so decide, they can keep the property after paying the amount of the loan and interest due. If the borrower desires to settle the loan before 15 years, he can also do so.

Advantages of the scheme

(i) The loan, in the form of a lump-sum or monthly instalments, is not required to be paid during the life-time of the person, mortgaging the house or his/her spouse.

(ii) The house can remain occupied by the mortgager or his/her spouse during the period of their lives.

(iii) The provision in the scheme for revision of the value of the house every five years when market value rises can enable the mortgagee to get a higher amount (as loan or instalments) if the value gets enhanced.

(iv) The mortgage is to be for 15 years. If the mortgager or the spouse survives beyond this period, they will not be evicted but will continue to live in the house till the last of the spouse survives. Of course, in the meantime, the interest on the loan amount will continue to be charged. However, if the instalment system of loan is chosen, the instalments will stop after 15 years.

(v) If the borrower or the spouse dies early i.e. before 15 years, the amount to be recovered would be only that, which has been given to the borrower or spouse by way of loan or in instalments.

(vi) If surplus remains after the sale of the property mortgaged after adjustment of loan and interest amounts, the balance would be refunded to the heirs of the mortgager.

(vii) The heirs, if they want to retain the property can do so by paying the amount of loan with interest to the lender bank.

However, the serious disadvantage of this is that it is in the nature of a life-time commitment and the children of the borrower can create problems if the property is not self-acquired.

Other countries' experiences

The scheme of reverse mortgage has been very popular in countries such as the UK, Ireland, the US, Canada and Sweden. In the UK, it has been in vogue for nearly half a century. Known as `Safe Home Income Plans', the plans are fulfilling the rising needs of elderly people at a time of increasing costs of living. More than 50 per cent of the wealth in real-estate owned by Britons aged 65 and above is subject to such mortgages. An estimated 40,000 people in the UK are reported to take up reverse mortgage annually and the UK Financial Services Authority is planning to regulate such services.

As far as wealth-tax is concerned, there will be no tax liability as a house exclusively used for residential purposes is not an "asset" for levy of wealth-tax [see Section 2(ea)(i)(1)].

Tax implications

In regard to income-tax liability, the issue needs to be examined to see whether any income or capital gain shall arise if a person enters into an arrangement for reverse mortgage.

The first issue, in cases where option for payment in instalments is preferred, is whether the monthly instalments can be treated as income. Obviously, the amount received would be receipt of loan amount in instalments and, hence, cannot constitute income. However, if the total receipts on account of Choice-1 and Choice-2 are compared, a higher amount would be received under Choice-2. This can be illustrated with the following figures concerning age group 71-72:

Amount received under Choice-1 —

Rs 50,00,000

Amount received under Choice-2 —

Rs 61,20,000

(Rs 34,000 x 12 x 15)

Difference- Rs 11,20,000

This can be taken to represent interest and can be subjected to tax after deduction of interest at 10 per cent, which the borrower is expected to pay on the loan amount.

The second issue would relate to capital gains. No liability for capital gains would arise when the property is mortgaged, because a mortgagee is not considered as `transfer' within the meaning of this term as given in Section 2(47) of the Income Tax Act, 1961 (Act). This question would arise when the property is finally sold. At that time, the amount of capital gain or loss can be computed in accordance with the provisions of Section 48 of the Act after taking into account the cost inflation index for consideration in the hands of the borrower or his heirs, as the case may be.

(The author is a former chairman of CBDT.)

More Stories on : Stock Markets | Financial Services

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Reverse mortgage: A boon for the elderly