With the explosion of nuclear families in India, senior citizens are finding it increasingly difficult to finance their personal expenses. Old age is filled with problems that never seem to end. Elderly people find it difficult to meet their medical expenses within the usually small pool of investments that they have made. It becomes challenging for them to live their life with contentment
Though government employees do get their regular pension when they retire, it is no where near enough to meet their needs upon retirement. For self-employed and other salaried individuals the situation is worse, especially if they do not have any savings.
In India there is barely any financial assistance provided by the government for senior citizens who have retired and do not have any regular source of income. It was in this regard that the Union Budget 2007-08 introduced comprehensive guidelines for the concept of reverse mortgage.
Reverse mortgage is a scheme that provides mortgage loans to senior citizens above 60 years, who might not be eligible for any other type of loan. Senior citizens can mortgage their house property to a lender. The lender in return makes periodic payments to the borrower during his/her lifetime, up to a maximum period of 15 years. The borrowers can continue to stay in their mortgaged houses as long as they live. The borrowers are not obliged to repay the loan; the lender simply attaches the property if the borrower and his/her spouse pass away. Even if the borrower and his/her spouse were to outlive the tenure of the reverse mortgage, they can live in that house until their last days. They would just stop receiving the installments from the lender.
Reverse mortgages have a host of advantages, the main among them being that senior citizens have a viable income now to meet expenses. Since this is a secured mortgage instrument, the borrower does not require a regular source of income to be eligible for the loan.
The borrower can continue to stay in the mortgage house till he/she and spouse pass away or change residence, while receiving the periodic payments from the lender. While the property is hypothecated to the lender, the borrower will remain the owner of the property throughout the tenure of the loan. The reverse mortgage can be disbursed in regular installments or as lump sum.
However, the concept of reverse mortgage has not yet picked up in India, though it is very popular in the West. Since it is a new model there is a bit of confusion among the borrowers as well as lenders.
The tax treatment is not yet very clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan. There is also no clarity on whether the lender has to pay a property gains tax on the sale of the property.
Banks are finding it difficult to work out the interest component to be charged on reverse mortgage. Moreover, they insist on insurance cover for this product, but there aren’t any insurance products to back this concept.
The author is a Research Analyst at Apnaloan.com Services (P) Limited.
May 30th, 2008 at 12:09 pm
I think this is a very good way of security for the aged people. However, people in India should be really made aware of this beneficila scheme. Good research. Keep it up!!
May 30th, 2008 at 3:23 pm
I think its a very good way of making people know of such schemes that are available to senior citizens.And indeed a very siple way of explaining people what reverse morgage is.Good Job!Keep it up!!!
May 30th, 2008 at 10:00 pm
Its an amazing article ….. people should come to know about such schemes especially senior citizens …. the way its explained is also good but there is a confusion between lender and the borrower … the defination should be clear as far as taxation is concerned …. in short the concept is amazing. Good Job ….. Dude!!!!!
June 1st, 2008 at 7:49 pm
ya right…
June 2nd, 2008 at 12:14 pm
Gr8 scheme for senior citizens and they should be made aware of it. Good article and really well written. Keep up the good work and lookin fwd for your future articles.
June 2nd, 2008 at 7:27 pm
This is a good basic piece on reverse mortgage. But would like to know from what age would be one eligible for this type of loan. the logic of this loans being success full in west because there people are relaxed since they are covered under the social security system and for the short fall they take this kind of loan. The same is not the case in case of Indians.
June 5th, 2008 at 1:27 pm
Good informative article…
The budget 2008-09 has clarified that the income from reverse mortgage would be tax free. The same does not amount to transfer and thus cannot be categorized as income…
Market Value of Property
45,00,000
Eligibility for loan (assuming 75% of market value as value for reverse mortgage)
33,70,000
Interest Rate
10.75% p.a.
Monthly income – Tenure of 10 years Rs 15,795
Monthly income – Tenure of 15 years Rs 7,593
Monthly income – Tenure of 20 years Rs 5,392
As the income is tax free, it is indeed a lucrative offer to senior citizens who are independant and want a regular source of income for retirement…
I beleive in the coming years, this would be a crucial aspect of Retirement Planning…
June 13th, 2008 at 3:15 pm
Is there a provision for a borrower who may want to pay the lender back in full & recover the property?
June 25th, 2008 at 5:15 pm
Hi Bhakti !
Reverse Mortgage concept was introduced in India a year ago but still not popular among Senior Citizens but very popular in America & in other countries.
This concept is called a Reverse Mortgage because Mortgage Company pays you rather than you paying to the Company.
Whether payments received through this concept should be treated as Income or Loan amount for Senior Citizens is a confusion in India.
If payment is treated as Income then Tax Implications would be liable for Seniors but if treated only as Loan it is Tax Free Product.
This concept can be an EASY source of Finance to many who would not like to depend on any one for FINANCIAL Support during their Retired Life.
Senior citizens can also take the advise of Mortgage Professionals before taking any decision because REVERSE MORTGAGE can be Great Opportunity for senior’s to obtain a better Lifestyle.
According to my knowledge for some Senior Citizens, Mortgaging their Home at this Age may not be the best solution. So, in that case Senior Citizens can sell their Home and can move to smaller one & place the Money in Bank.
And can live rest of their life taking care of all their Requirements without facing any Difficulties.
Would be great if you could stress more on its Flip side as well.
Regards,
October 15th, 2008 at 3:03 pm
“Interesting concept…however you have only stressed upon the positives…people in India live in joint families and as far as senior citizens are concerned they may not part with their property.
Reverse mortgage is ideally selling your property however you are allowed to stay till whenever or lifetime and is taken over by banks after your death…It has a great potential to be used as a retirement tool..however not efficiently used in India…there surely be some advancements on the same in the future with the rate at with Insurance is growing in India.”
November 20th, 2008 at 12:14 am
Very good write-up!!! I will remember this concept as it will be of great help when I turn a senior citizen.
November 26th, 2008 at 5:32 pm
with increase in the longevity, 15 years is too short. there are many hale and healthy even after 75 and they live up to 85.if the lender stops installment after 15 years what the borrower is supposed to do. yes he can continue to live in the flat/house. But what he does for living?It has to be explained
December 18th, 2008 at 12:40 pm
Great concept didn’t know its’s available in India as well as i was aware of it’s presence abroad…good write-up
December 18th, 2008 at 12:42 pm
Very well explained however this piece could have been much better had there been some few real life examples.
December 18th, 2008 at 12:44 pm
Reverse mortgage also known as equity release…what else you want if you can get income against your property in your old age as its a form of retirement plan.