REVERSE MORTGAGE- A STEP FORWARD

In very simple words, mortgage is a transaction where
a mortgagor takes a loan from a mortgagee, against a
security. Thus, we can say that a mortgage is a transfer
by way of security.

Unlike other transfers, such as sale,
lease, exchange or gift, a mortgage has no independent
existence of its own. There can be no mortgage without a debt.
The security provided is an immovable property.

A property can be mortgaged in any of the following ways:-
1. Simple Mortgage.
2. Mortgage by Conditional Sale.
3. Usufructuary Mortgage.
4. Mortgage by Deposit of Title of Deeds.
5. English Mortgage.
6. Anomalous Mortgage (which is a combination
of any two of the above).

1. Simple Mortgage: When the possession of the mortgaged
property is not transferred from mortgagor to the mortgagee.
 If the mortgagor fails to repay the loan, the mortgagee has
 the right to sell the property and recover the loan from the sale amount.

2. Conditional Sale: Here the mortgagor apparently sells the
property to the mortgagee subject to certain condition.
The condition may be either of the following:

a. On failure to repay the mortgage money before a certain date the sale
 shall become absolute, or
b. On such repayment of mortgage money the sale shall become invalid, or
c. On such repayment the mortgagee shall retransfer the property.

3. Usufructuary Mortgage: In this type of mortgage, the possession
of the mortgaged property is transferred to the mortgagee.
He receives the income from the property, eg. rent, profit etc,
until the repayment of the loan. The title deeds remain with the owner.

4. Mortgage By Deposit Of Title Deeds: Here, the mortgagor
delivers the title document of the property to the mortgagee with
an intention to create a security thereon. This mortgage can be
entered into only in the towns of Chennai, Kolkota, Mumbai
or any other town, as notified by the State Government in the official gazette.

5. English Mortgage:
a. The mortgagor transfers the property absolutely to the mortgagee.
b. The mortgagor binds himself to repay the borrowed money
before a certain date.
c. Such transfer is subject to the condition that the mortgagee will
retransfer the property on repayment before the agreed date.

And reverse mortgage is a new addition to these types of mortgage.
Reverse mortgages are available in Ireland, United Kingdom,
Australia, the U.S. and other countries in various forms.
"Life loan" (Irish/UK term for a reverse mortgage) programs are
very similar to U.S. reverse mortgages. In India it’s relatively a
new kind of mortgage, though in other parts of world this type of
mortgage has been in use for quite a few decades now.

Reverse Mortgages
Reverse mortgages have been popular since the Roman Empire – literally
means - "loans until death". Reverse mortgages have effectively been
around since Roman times in the form of usufruct.

Usufruct is the legal right to use and derive profit or benefit from
 property that belongs to another person, as long as the property is
not damaged. In many legal systems of property, buyers of property
may only purchase the usufruct of the property.

This form of mortgages is aptly named because the payment stream
 is “reversed.” Instead of making monthly payments to a lender,
as with a regular mortgage, a lender makes payments to the borrower.
Unlike a regular mortgage, the borrower can continue to stay in his
mortgaged home during his entire life span without any fear of eviction
 even after the tenure expires.

Reverse mortgages can be secured by
either urban or rural property. The amount of the loan available will
depend on the borrower’s age and the value of his equity.

It is essentially a loan given to senior citizens by converting the
 equity in a house property into an income stream. The scheme
 involves the borrowers (senior citizens) pledging their house property
to a lender (scheduled bank or HFC) in return for a lump sum or periodic
payments spread over the borrower’s lifetime.

The home owner is not
 obliged to repay the loan during his lifetime.
On his death or leaving
the house permanently, the loan is repaid along with accumulated interest,
through sale of the house property. Any excess amount will be remitted
 to the borrower or his heirs.

The lumpsum or periodic payments can be utilized by the borrower
 as per his needs but not for speculative purposes. After the death of
the borrower and the borrower’s spouse, the housing company sells
the property to recover the amount paid out along with interest at a rate
 similar to interest on housing loans.

If the owners of the house live for a
 longer period, the sum that the heir will have to pay would be bigger as
 the interest amount will go up. But, if he did not survive even to claim
the amount for entire period that was agreed for, the repayment amount
 due to his heir will be smaller. Ownership title of the house making
it all the more popular among Indians who have a natural instinct for
 own home.

However, on the flip side, traditional joint family system, stronger
 bequeath motive and widespread undervaluation of real estate properties
involving unaccounted money, tax evasion and benami holdings can be
 major deterrents for the scheme to take off.

How does the reverse mortgage scheme works?
Under a reverse mortgage, the real estate to be mortgaged has already
been purchased and any financial charges on title to it have been discharged.
The borrower is not expected to make periodic payments, or any payments,
until the loan comes due. For the lender, the value of the mortgaged property
is paramount; for the borrower, the loan is obtained to supplement income
or to enable purchases of assets other than the mortgaged property.
Eligibility limits on reverse mortgages are much less stringent that traditional
 forward mortgages.

Outside of homeownership, the borrower must be at least sixty years of age.
Given the importance of the value of the reverse mortgage borrower’s property,
 reverse mortgage lenders require that potential borrowers obtain an appraisal
 of their property. The potential borrower must pay for this appraisal.
The cost of the appraisal should be borne in mind by borrowers;
it will form a non-interest charge that should be factored into determining
 the overall cost of borrowing under a reverse mortgage.

Some reverse mortgage
 lenders require borrowers to retain independent legal representation for
the reverse mortgage transaction. Others require borrowers to provide a certificate
of independent legal advice as one of the closing documents for the loan.

Reverse mortgage lenders insist on having the first mortgage
on title to the borrower’s property. If the borrower’s title is
encumbered by other financial charges, then the borrower will
be obliged to use part of the reverse mortgage proceeds, or
other funds, to pay out and discharge these other charges.

Difference between a Traditional Mortgage and Reverse Mortgage
Contrasting Reverse Mortgage From Traditional Mortgages
Item Reverse Mortgage Traditional Mortgage
Purpose of loan To release the equity in the home and use the proceeds
to live a more comfortable, stress-free, retirement To purchase or
refinance a home
Before loan closing, Substantial equity in the home No or little equity
in the home
At loan closing, Owe very little and have substantial equity Owe a lot,
and have little equityWhile the loan is outstanding,
You receive payments from the lender
Loan balance rises
Equity declines You make payments to the lender
Loan balance goes down
Equity grows
At the end Owe whatever amount was borrowed, plus accrued interest
Have much less, little, or no equity Owe nothing
Have Substantial Equity
Final analysis Rising Debt-Falling Equity Loan Program Falling
 Debt-Rising Equity Loan Product


Taxation Issues
In the context of the introduction of the Reverse Mortgage scheme,
 it was necessary to resolve the tax issues arising there-from.
The first issue was whether mortgage of property for obtaining a
 loan under the reverse mortgage scheme is a transfer within the
 meaning of the Income-tax Act, 1961 (“Income Tax Act”) thereby
giving rise to capital gains. Section 2(47) of the Income-tax Act provides
an inclusive definition of ‘transfer’. Further, ‘transfer’ within the meaning
of the Transfer of Property Act, 1882 (‘Transfer of Property Act”) includes
some types of mortgage. Therefore, a mortgage of property, in certain cases,
 is a transfer within the meaning of section 2(47) of the Income-tax Act.
Consequently, any gain arising upon mortgage of a property may give
rise to capital gains under section 45 of the Income-tax Act.

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 (xvi) in section 47 of the Income-tax Act, has been
 subsequently 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.

The second issue was whether the loan, either in lump sum or
 in instalment, received under a reverse mortgage scheme amounts
to income and whether the receipt of such loan is in the nature of a
capital receipt. As a consequence Section 10 of the Income tax Act,
has been amended to provide that any amount received by an individual
 as a loan, either in lump-sum or in installment, in a transaction of reverse
mortgage referred to in clause (xvi) of Section 47 of the Income-tax Act
shall not be included in total income. [under Section 10 (43)]

Therefore 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 of the mortgaged property by the mortgagee for the
purposes of recovering the loan.