By Aishwarya Vashishth, Lawyer
firstname.lastname@example.org | Sep 21, 2021
“Reverse Mortgage” means “an agreement under which an owner of a primary residential property borrows funds from a Bank/Financial Institution (being the Lender) against the security of his ownership rights by mortgaging the same and receives Loan amounts by way of regular tax-free payments (monthly/quarterly/yearly) from the Lender without having to sell his residential property during the validity of the mortgage”. The amounts received under Reverse Mortgage are considered as loans and not income, hence, the same do not attract any tax liability. The benefit of Reverse Mortgage is available only to Senior Citizens.
The concept of Reverse Mortgage which is very popular in countries like the U.S.A. and U. K. is also prevalent in India
The Reverse Mortgage is normally “a life annuity” for a Senior Citizen. It is often found that a Senior Citizen has a decent home to live in but has no means to maintain themselves and live a decent and dignified life. In Reverse Mortgage, the Capital Value of the residential property is converted into an annuity over the lifetime of the Owner and their spouses. In return for the Reverse Mortgage, the Lender makes a lump sum payment to the Borrower or periodic payments during his/her life for a certain fixed period. In Reverse Mortgage one is not required to make any monthly mortgage payments as long as the Borrower (and/or his/her spouse) continues to stay in the residential property as the Owner. There are no income qualifications. The house continues to be in the name of the Borrower during the validity of the mortgage. The Reverse Mortgage is available only on primary residence (in existence of at least 20 years) and not on a second home/house or any commercial property.
Reading the Fine Print
Each bank/financial institution lending under Reverse Mortgage in India has different norms and terms of its own. Depending on the valuation of the residential property, the financial facility is granted up to 3 years. The Borrower can utilize the amounts for various purposes like renovation and maintenance of the house, family’s medical or emergency expenditure, day-to-day living expenses, and similar other personal expenses. However, the borrowings thereunder cannot be used for any speculation, trading, business, or commercial purposes.
The mortgage debt under Reverse Mortgage shall interalia include the loan amount, application fees, processing fees, interest (compounded), penal interest (if any) and prepayment interest, etc.
The “Reverse Mortgage debt’ becomes forthwith due and payable in full on the occurrence of any of the following events, namely: –
- Upon the borrower (and/or his/her spouse) or the last of the surviving borrower if there is more than one borrower passing away or sells the house.
- Upon the borrower permanently moving out of the house.
- Upon the borrower failing to pay property taxes, maintenance charges, and insurance of the house.
- Upon the last surviving borrower failing to live in the house for 12 consecutive months without sufficient cause or justification.
- Upon the Borrower allowing the property to be deteriorated beyond what is considered as reasonable wear and tear and fails to restore the deterioration.
- Upon the Borrower or any of them (if there are more than one) is declared Bankrupt/Insolvent.
- On account of perpetration of fraud or misrepresentation by the Borrower relating to the mortgage transaction.
- The Government condemning the said residential property (for health or safety reasons).
- The Government under statutory provisions acquires the said residential property.
- Upon the Borrower committing any breach of the terms and conditions of the loan agreement and other incidental writings.
The Reverse Mortgage debt is satisfied out of the sale proceeds of the said residential property and if found insufficient, also from the estate of the Borrower. Surplus amount, if any, will be remitted back to the Borrower or his legal heirs. The legal heirs have the preferential right to redeem the Reverse Mortgage by making payment of mortgage debt and they will be given preference for doing so.
The Borrower also has to consider the “adverse effects” of the present scheme of reverse mortgage highlighted below: –
(a) The maximum tenure of payments can be of 10 to 20 years. Beyond the said period, the Borrower can stay in the residential property but he will not be eligible for any further payments.
- The Financial Institution/Bank has the option to revise the lump sum amount/periodic payments at such frequency or intervals based on the revaluation of the property or at least once every 5 years.
- Since the reverse mortgage can be either at a fixed rate of interest or floating rates, it will be prone to attract interest rate movements. Hence, in the scenario in the case of floating rate of interest on Reverse Mortgage, it could add to the Borrower’s liability if the rate goes up.
- Under the Reverse Mortgage, the legal heirs of the borrower are not entitled to take control over the mortgaged residential property until the outstanding loan amount/mortgage debt is first cleared and before they would stake their claim to the property.
The Bank/Financial Institution at its discretion may levy a penalty or other charges on prepayment of the loan. If the Borrower or his heirs wish to prepay the loan amount, they may have to bear this additional cost.
In India, the concept of reverse mortgage has been progressing slowly as houses are seen as family assets for inheritance. Major public-sector banks offer reverse mortgages at competitive rates. Borrowers who wish to opt for the scheme of “Reverse Mortgage” must acquaint themselves with the prevailing guidelines and terms and conditions of loan/periodical payments and carefully consider its pros and cons.