With westernization of the Indian society various financial products from the west relating to social security like Reverse Mortgage are making their entry into India.
These products are gaining importance as the percentage of aged people in the total population is steadily increasing and the migration from joint families to nuclear families.
Reverse mortgage is a scheme wherein the borrower (60 years or more) pledges his/her house and derives a monthly/quarterly/half yearly/annual income for a maximum period of 15 years or a lump sum payment. Loans will be given at 40%, 55% or 60% of the market value depending upon the age of the borrower. These loans do not require any repayments as long as the “principal resident” lives in the house but should be repaid when he/her dies, sells the property or moves away. Looking at the way this product is structured it would be useful to aged people who:
a) have houses in posh localities but are not cash rich ,
b) Do not have children or
c) Deserted by their children (rare phenomenon in yester years but increasingly gaining ground)
The finance minister has also clarified that the amounts received from Reverse Mortgage is not taxable as the same represents receipt of loan. However capital gains would arise on sale of the property by the borrower himself or his legal heirs.
After the expiry of the mortgage period preference will be given to the owner or his heirs to repay the loan along with interest and get the mortgage released. Lender can retain only amount lent by him and interest, any surplus over and above it will be paid to the legal heirs. All reverse mortgages have a “non recourse feature” wherein the amount owed exceeds the market value of the house then the lender has to absorb the loss.
From the lender’s perspective there are a few concerns:
a) Amount paid will be received after a period of 15 years and so will the interest.
b) Accounting for reverse mortgages – on cash or accrual basis.
c) Securitisation act does not cover reverse mortgages
Indians are emotionally attached to their properties and want to pass it on to the next generation hence this product would be the last resort. However this would be a good option for elderly couples who do not have children and wouldn’t want to depend on others for their financial needs.
2 comments:
Your blog has become something like a newsletter where daily it gives some update on tax, accounts etc.
Well... I am writing these things down because in case I forget these I can use it as a reference.... It also helps you keep track of the legislative history...Anyways I wanted to blog on Varanam... but it disappointed me so much that even blogspace was a waste for the movie...
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