Reverse Mortgage Loan (RML) enables a Senior Citizen — In India, citizens above 60 years age to avail of periodical payments from a lender against the mortgage of his/her house. Such a loan allows the borrower to continue to occupy his house as long as he lives. Unlike other loans, reverse mortgage need not be repaid by the borrower.
How are such loans structured?
In India, RMLs can be extended by banks and housing finance companies registered with the National Housing Bank. The loan amount is dependent on the value of the house property as assessed by the lender, age of the borrower(s) and prevalent
interest rate. The loan can be provided through monthly or quarterly or half-yearly or annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three. The maximum period of the loan (over which the payments can be made to
the reverse mortgage borrower) is 20 years. The lender on the other hand has to value the property periodically at least once in five years and the quantum of loan may be revised based on such re-valuation of property at the discretion of the lender.
How are such loans settled?
On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrowers or their heirs also have the option of prepaying the loan at any time during the loan tenor or later, without any prepayment levy. The borrowers/heirs can also repay the loan with accumulated interest and have the mortgage released without resorting to
sale of the property.
Are there any taxation issues?
A mortgage of property, in certain cases, is a transfer under the provisions of the Income-Tax Act. Consequently, any gain arising upon mortgage of a property may give rise to capital gains. However, in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property. A new clause has been inserted to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer. A borrower, under a reverse mortgage scheme, shall, however, be liable to income tax (in the nature of tax on capital gains) only at the point of alienation ofthe mortgaged property by the mortgagee for the purposes of recovering the loan.