Reverse mortgage is the loan given to senior citizens who posses a self-occupied property. As per the reverse mortgage the senior citizens (borrowers) can mortgage their house to the bank (lender). The bank in turn gives a lump sum amount or pays periodic installments to the borrower. This product enables the borrower to get a regular source of income while they continue to stay in their house.

In spite of being a very useful product for retirement planning it has not picked up in our country, the reason being as of last year the tax treatment on reverse mortgage was unclear. In the Union Budget 2008-2009, the Finance Minister P. Chidambaram explained the tax treatment on reverse mortgage.

As per Budget 2008-2009 the reverse mortgage will not amount to a transfer. This means that mortgaging of the property by the senior citizens to the bank will not be considered as transfer of an asset and therefore it will not attract any capital gains tax.

Secondly, the stream of revenue received by the senior citizen will not be income. This implies that the lump sum amount or the amount received in installments by the senior citizens for mortgaging the house to the lender is not taxed as income.

However in case the senior citizen or his/her legal heir (s) want to repay, the loan amount will not be eligible for tax deduction on the interest repaid and will have to pay capital gains tax on the sale of the property.

Reverse mortgage can prove to be very helpful for those senior citizens who do not have any source of income and do not plan to leave behind an estate for their legal heirs.

“Defaulter” is a dreaded tag for both the lender and the borrower. Who are the people who default on loans? Why do they take a loan if they can’t afford to repay? How do they get a loan in the first place?

A defaulter can be a salaried or self-employed, middle class individual. Or, a high end customer with residences and offices in prime localities. (There are ample reports to prove this!) Defaulters could belong to any segment of society.

Could it be that defaulters just dupe banks if the outstanding runs into a few lakhs? Well, it could just as well be just a few thousands. Or it could be money taken to buy a new car or a personal loan to invest in a business. The borrower may just choose not to pay.

There could be a few genuine reasons for which a borrower may not be able to repay a loan, momentarily, or at all.

The current market crash and the resulting economic slow down have cost many people their jobs. Deprived of the means to repay, these people may not be able to pay off the loan.

Another reason could be unsound medical condition or ill-health. If an individual is confined to bed for a period of time for medical reasons. Or, is impaired temporarily or forever.

Yet, another could be divorce. It’s common to take a joint loan with a spouse to increase the loan eligibility. And then, one fine day (!), the marriage busts. A study suggests that 11 out of 1, 000 marriages end up in divorce in India. If the separated partner does not have sufficient means, the loan could end up as a default.

And here is something interesting. You can default intentionally too! Yes, despite stringent lending norms, there are borrowers who default intentionally. Here’s how:

Fudging identities and forging documents
A newspaper report talks about Mandeep Singh from Panchkula who applied for a loan of Rs seven lakh for buying a Mahindra Scorpio. Posing as car tool-kits trader, he got the loan. He submitted a photocopy of his PAN card and an income tax return of some town in Himachal Pradesh. It was difficult for verification agency to clearly ascertain the claims. After repaying a couple of installments, it was found that the borrower was a fraud and was untraceable. All the submitted documents were fake.
Another common instance of forgery is that of a bank statement. It has been seen that potential borrowers shows a high account balance till the time the loan is through. Once done, he withdraws the amount. Salary statements and addresses seem to be on the top of the list of forgeries.

Organised rackets
If you have some hands-on experience with dealing in bank loans either as verification or sales agent of loans or credit card sales through telemarketing, you may find the ‘Mr Hyde’ side of your personality planning sinister stuff. All you will need is a set of original documents (anyone’s). Don’t ever trust your friends or an agent so much that you hand over your original documents and forget about them. These documents could be misused.

Can ING Vysya bank disburse 85% of home loan without the consent of borrower and without any signatures of borrower on final disbursement document? It has happened to me and for that I have to unnecessarily pay pre-EMI. Can I lodge an official complaint with RBI because the builder has already deposited the cheque?