It is the last solution for a retired person. But one that many, who are in the unfortunate position of being house-rich but cash-poor, are being forced to consider. The reverse mortgage product has been in India for more than three years now, but it is still in its early stages of development.
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However, a new product to hit the market shows that the product is evolving and may be more friendly to the customer than the ones that are currently in the market. Central Bank of India’s reverse mortgage loan annuity (RMLA) product, called Cent Swabhiman Plus, combines annuity with a plain-vanilla reverse mortgage product for an old couple to overcome the risk of living too long.
In a regular reverse mortgage, the owner borrows against the equity in his house and gets regular monthly payments from the bank, usually for 15 to 20 years. If the borrower outlives the tenure, he is not asked to move out of the house, but payments stop.
Under RMLA, you get regular income throughout your life. Says Arun Kaul, executive director, Central Bank:
“We pass on the value of the house to the insurance company by paying premiums. The insurer, in turn, makes regular payments to the beneficiary through the bank.”
Unlike regular reverse mortgage, where the banks make the payment, here the bank merely acts as an interface between the insurer and the customer.
It’s cheaper: Look at a reverse mortgage product as a loan against the house on which you have to pay interest. So, the lower the rate, the better it is for you. RMLA comes with a fixed rate of 9.50% with a reset option every two years. On the other hand, most other products in the market are more expensive (you get less income)—at 10.25-12%.
Flexibility: Most products allow you to access income on a monthly, quarterly, half-yearly or annual basis. RMLA also gives the option of taking 25% of the amount as lump sum loan and the remaining as annuity.
RMLA has two options that come with the annuity product it buys from Star Union Dai-chi Life Insurance Co. Ltd.
Option 1: Called, “without return of premium”, this gives annuity till you die. After that, your heirs can repay the entire amount you received (premium and interest) to get back the house. Since you get more money under this as compared with the other option, it works best for those who don’t have an heir. For a property worth Rs1 crore, the annuity for a person aged 60-65 years will be Rs39,600 per month, according to Central Bank.
Option 2: This option is called “with return of premium”. Under this, after your death, the insurer will repay the premiums to the bank. If your heirs want to get back the property, they will have to repay only the interest. You get lower annuity, but your kids need to pay less to recover the house. For a house worth Rs1 crore, you will get a monthly annuity of Rs28,880.
The difference between a regular product and this one is in the tax treatment. Says Gautam Nayak, chartered accountant, Contractor, Nayak and Kishnadwala: “All payments under reverse mortgage loan are exempt under section 10(43) of the Income-tax Act. But, monthly or periodic annuity payments are defined as ‘salaries’ under section 17 and are taxable.”
This means that you will have to pay income-tax on the annuity on RMLA. For a house worth Rs1 crore, the product will give you a loan of Rs60 lakh, on which you will get a monthly payout of Rs39,600 for lifetime if you go for Option 1 or an annual income of Rs4.75 lakh. You will pay a tax of about Rs5,000 (assuming you exhaust all tax deductions available under section 80C and section 80D) and still get a disposable monthly income of Rs39,171.
Compare this with State Bank of India’s reverse mortgage product that comes at an interest rate of 10.75%, promising regular income for 15 years. It gives just Rs22,500 per month or Rs2.7 lakh annually. This tax-free income is less than the tax paid for RMLA.
What should you do?
Reverse mortgage products are still in their infancy in India. If you are really pushed for cash and must give up your house, the Central Bank product looks to be the most consumer friendly as of now.
Illustrations by Shyamal Banerjee / Graphic by Yogesh Kumar/Mint