When the Reverse Mortgage Scheme was introduced in 2008-09, it was expected to be widely accepted and beneficial to senior citizens. However, in its 5 year history, there have been few takers, and only Rs. 800 crores worth Reverse Mortgage Loans have been disbursed of the estimated market size of Rs. 20,000 crores. To sweeten the scheme and attract more senior citizens, the Government has recently brought about some important changes to the scheme, the most important being making annuity payments tax free.
So what is the Reverse Mortgage Scheme? For the uninitiated, let’s give a quick background. Budget 2007-08 saw an introduction of a scheme, wherein senior citizens (above the age of 60) could unlock the value of their property and earn a regular income, while continuing to remain owners and staying in the property. This means a senior citizen who owns a property and is in need of regular cash flows can mortgage his property with a bank or housing finance company. The bank will value the property and set the interest and tenure of the loan.
The senior citizen then gets a certain proportion of the house value as a loan. Part of the amount is paid as lump-sum and the remaining amount is regularly paid as annuities as per the frequency opted i.e. monthly, quarterly etc. |
The Reverse Mortgage Scheme has had few takers in its 5 year history. The Government recently announced some changes to the scheme to increase its popularity. These include making the annuities received by the senior citizens tax exempt, increasing the period of annuities receivable to the lifetime of the borrower and a possible increase in the amount of annuity received.
The catch here is that the bank can sell the property and recover the loan if the borrower permanently moves out of the house (for example, to an old age home) or on the death of the last surviving spouse. Any extra amount after settling the loan is paid to the legal heirs. If the legal heir wishes to save the property from being sold by the bank, he can pay back the loan to the bank, along with the accrued interest till date.
Although annuities paid by banks were tax free, they were very low. It was possible to take an insurance cover for the Reverse Mortgage Loan where the annuities received by insurance companies were higher than that received by banks. However, such annuities were thus far taxable in the hands of the senior citizen, which was a huge disincentive to the scheme.
Recently, the National Housing Bank Chairman announced that annuities from insurance companies will also be tax free. This is expected the make the scheme more attractive, as the income earned will not be taxed. |
Another development is that the annuity amount is expected to go up by 3 times, as insurance companies are more adept in offering annuity products compared to banks. There will be a tri-partite agreement between the lender, the insurance company and the borrower.
Earlier the loan was only for 20 years from the date of signing the agreement. That is, annuity payment was restricted to 20 years only. However, now this period has also been extended to ‘the residual life time of the borrower’, meaning that as long as the owner is alive, he will get the annuity payments.
Although popular abroad, the Reverse Mortgage Scheme has not really taken off in India due to the sentimental value attached to the property, taxable income and complicated paperwork. It remains to be seen if the changes introduced can actually help in the pickup of the scheme. The recent development is a positive step in this direction. |
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