Monday, January 11, 2010

Reverse Mortgage - Ray of Hope for the Aged

An English proverb says “ An old man has 3 friends: an old wife, an old dog & the money in the bank.” However majority Indian senior citizens don’t even have a penny left in the bank, at the flag end of their lives. Their only asset is the residential house they live in .If their children don’t stay with them or if they stay in a foreign country, it poses problems for the senior citizens as to whom they should transfer the ownership right of the house property. This is becoming a social problem for countries like India & China. To help senior citizens solve such problems, the concept of Reverse Mortgage has emerged as a “ Friend in Need’’.

Reverse Mortgage is basically a home loan scheme. This scheme does not provide loans for buying house properties. The main aim of this scheme is to provide lump sum amount/ regular incomes for senior citizens, which they can obtain by mortgaging their house properties, subject to certain conditions. The senior citizens are not required to repay the loan amount in their lifetime. After death or whenever the senior citizen decide to leave the house property, the bank sells off the property and gets repayment of the loans given. If there is any surplus left after settling off the loan amount, it is handed over to the borrower or to his designated legal representatives. Revaluation of the house property under the mortgage is done within an interval of few years and if on account of the revaluation the value increases, the borrower has a fair chance of increasing his income. At any point of time, if the borrower so desires, he/she can clear off the loan amount with interest and get back the ownership of his/her house property. After the death of the borrower, the legal representatives of the borrower can get back the ownership of the house property, by clearing off the loan amount with interest to the bank.

A number of Tax benefits can be obtained from Reverse Mortgage. Since the house property is mortgaged & not transferred, a one-time lump sum amount received from the project is not considered as Capital Gains & hence no Income Tax is required to be paid. Again regular incomes received on account of the mortgage is not considered as Income & as such no Income Tax is required to be paid on these receipts. Thus this project is fully tax-free.

The concept of Reverse Mortgage started way back in 1929, during the Great Depression in England. Though Reverse Mortgage is very popular in the USA & other developed Western Countries, it is yet to gain popularity in India.

Few Banks & Financial Institutions like National Housing Bank, Dewan Housing Finance Limited, State Bank of India, Punjab National Bank, Indian Bank & Central Bank are offering Reverse Mortgage Projects. On & from 10.12.2009,Central Bank started a new Reverse Mortgage project by name “Swabhiman Plus” for Senior Citizens.

It is expected that the concept will gather momentum in the years to come.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)