Reverse Mortgage in India: A Smart Way to Boost Your Retirement Income

Reverse Mortgage is a financial product that allows senior citizens who own a residential property in India to convert their home equity into cash income without selling their home or making monthly loan payments. It is a way of unlocking the value of their property and using it to supplement their retirement income. Reverse Mortgage was introduced in India in 2007 by the National Housing Bank (NHB) to provide financial security and independence to senior citizens with limited income and savings sources. This article will discuss the features, benefits, eligibility, types, and risks of Reverse Mortgage in India and how it works in practice.

How Does a Reverse Mortgage Scheme Work?

To explain how a Reverse Mortgage works in India, let’s take an example. Suppose Mr Sharma is a 65-year-old retired person who owns a home worth Rs. 1 crore in Delhi. He wants to get some extra income to meet his expenses and enjoy his retirement. He decides to apply for a Reverse Mortgage loan from a bank.

• The bank sends an appraiser to inspect his home and determine its value.
• The bank also checks his age and other eligibility criteria.
• Based on these factors, the bank offers him a Reverse Mortgage loan of up to Rs. 80 lakhs at an interest rate of 10% per annum. The loan tenure is 15 years.
• Mr Sharma receives Rs. 50,000 monthly from the bank for 15 years.
• This means he will get Rs. 90 lakhs from the bank over the loan period.
• The bank will charge him interest on this amount monthly and add it to the loan balance.

At the end of 15 years, Mr Sharma will owe the bank Rs. 80 lakhs plus interest, which will be more than Rs. 1 crore. He can repay the loan by selling his home or using his savings or other sources of income. If he cannot repay the loan, the bank will sell his home and recover the loan amount plus interest. If there is any surplus after selling the home, it will be given to Mr Sharma or his heirs. If there is any shortfall, the bank will bear the loss and not ask Mr Sharma or his heirs to pay anything extra.

This way, Mr Sharma can use his home equity to get regular income without losing his ownership or possession of his home until he dies, sells or moves out of it.

Different Reverse Mortgage Types

Different Reverse Mortgages are available in India, depending on the lender and the borrower’s preference. Some of the common types are:

Lump-sum amount

The borrower receives a one-time payment from the lender based on the property’s value and the borrower’s age. This type of Reverse Mortgage may have a fixed or variable interest rate.

RML-enabled annuity

The borrower receives regular payments from the lender for a fixed period or life. The payments are based on an annuity purchased by the lender from a life insurance company. This type of Reverse Mortgage may have a fixed or variable interest rate.

Periodic advances

The borrower receives regular payments from the lender for a fixed period or until the loan becomes due. The payments are based on the property’s value and the borrower’s age. This type of Reverse Mortgage may have a fixed or variable interest rate.

The borrower can choose any type of Reverse Mortgage that suits his or her needs and goals. The borrower can also switch from one type to another with the consent of the lender and subject to certain conditions.

Who Can Apply For a Reverse Mortgage?

To be eligible for a Reverse Mortgage loan in India, the borrower needs to meet the following criteria:

• The borrower should be a citizen of India with a minimum age of 60. If the borrower applies jointly with his or her spouse, the spouse’s age should not be less than 55 years.
• The borrower should own a residential property in India that is self-acquired and self-occupied. The property cannot be a gift or an inherited property.
• The residential property should be free from encumbrances and have a residual life of at least 20 years.
• The borrower should maintain the home as his or her permanent primary residence and regularly pay the property taxes, insurance, and maintenance.

The eligibility criteria may vary slightly depending on the lender’s policy and discretion. The borrower should check with the lender before applying for a Reverse Mortgage loan in India.

Documents Required For Reverse Mortgage Scheme

To avail of a Reverse Mortgage in India, the borrower needs to submit the following documents to the lender:

• Proof of identity, such as voter ID, PAN, Aadhaar, passport, etc.
• Proof of residence or address, such as utility bills, Aadhaar, passport, etc.
• Employer identity card (if applicable)
• Property papers, such as title and sale deeds, tax receipts, etc.
• Account statement of the last 6 months for all bank accounts held
• Loan account statement of the last year (if any)
• Registered will
• List of legal heirs

The lender may also ask for other documents per their policy and discretion. The borrower should ensure that all the documents are valid and updated before applying for a Reverse Mortgage in India.

Tax Benefits On Reverse Mortgages

Reverse Mortgages in India can offer some tax benefits for the borrowers, depending on their situation and the type of loan they choose. Here are some tax benefits on Reverse Mortgages in India.

• The borrower’s income from the lender will be tax-free, as it is not considered income under the Income Tax Act.
• The amount spent on the renewal or repair of the house with the loan proceeds will be eligible for deduction in the computation of income, as it is considered an expenditure for the maintenance of the property.
• The loan repayment at the end of the loan terms will not be considered a transfer of property and hence will not attract capital gains tax or gift tax.
• The borrower can buy an annuity from a life insurance company instead of receiving money from the lender directly, which may provide tax benefits on the annuity payments.

However, Reverse Mortgages in India also have some tax implications that borrowers should be aware of, such as:

• The loan may affect the eligibility for other government benefits, such as pension and income tax benefits, with income and asset limits.
• The interest paid on a Reverse Mortgage is not deductible in the year it is paid, but it can be added to the loan balance and deducted when the loan is repaid or the home is sold.
• The loan may trigger a capital gains tax liability if the home is sold for more than its cost of acquisition or improvement, which is the original purchase price plus improvements minus depreciation.

Points To Remember In Reverse Mortgage

Here are some points to remember in Reverse Mortgage in India:

• You must own your home outright or have a low mortgage balance that can be paid off with the loan proceeds.
• You must live in the home as your primary residence and keep up with property taxes, insurance, and maintenance.
• You can receive the loan proceeds as regular monthly, quarterly, half-yearly, or lump sum annual periodic advances.
• The loan balance grows over time as interest and fees are added.
• The loan becomes due and payable only when the last surviving borrower dies, sells the home, or permanently moves out of the home. If the loan balance exceeds the home value at that time, you or your heirs can settle the loan along with accumulated interest without a sale of the property.
• The loan may affect your eligibility for government benefits such as pension and income tax benefits.
• Before applying for a Reverse Mortgage, you should consult a financial counselor to understand the costs, benefits, and risks involved.