Under the original Reverse Mortgage Loan (RML) scheme introduced in 2007-08, the senior citizen receives payments over a maximum period of 20 years. While you will not be paid after this period, you can occupy the house as long as you live.
But the periodic payment made by the banks or housing finance companies is less, since it is mainly dependent on the interest rate. Also, the maximum monthly payment is capped at Rs 50,000, and many lenders cap the maximum loan amount at Rs 1 crore.
On revaluation, if the house value drops below the outstanding loan amount, the lender may stop paying you. On the positive side, the payments you receive in RML schemes are exempt from income-tax and capital gains tax. Many banks and housing finance companies in India offer this scheme.
Many senior citizens expressed fear that restricting the payment tenure to 20 years in the RML scheme may deprive them of income when they need it most in their later years. To overcome this problem, a new Reverse Mortgage Loan enabled Annuity scheme was introduced in 2009.
This scheme involves banks and housing finance companies tying up with insurance companies to provide periodic payments (annuities) to senior citizens, as long as they live. This covers the risk that you may live longer than expected. With mortality tables being used by the insurers to determine payments for different age-groups, the annuity is much higher than in the earlier RML scheme.
At present, only Star Union Dai-ichi Life Insurance in collaboration with Central Bank of India offers the RML enabled annuity scheme. LIC, along with Corporation Bank, is considering launch of this product. Say you are aged 60, and take a reverse mortgage loan of Rs 30 lakh (at 60 per cent loan to value on property valued at Rs 50 lakh). According to calculations made using the product annuity table of Star Union Dai-ichi, the company will pay annuity of around Rs 19,500 per month or Rs 14,400 per month, depending on the option chosen. Servicing charges of the bank (maximum 1.5 per cent of the principal outstanding) and income tax, if applicable, will eat into your returns.
Yet, it will still be higher than what you would receive under normal RML schemes. Most banks today offer RML loans at or above 12.5 per cent per annum. At this rate and at similar loan terms mentioned above, the payout under RLM scheme considering the maximum tenure of 20 years works out to only Rs 2,834 per month. Even at higher loan to value, returns under RML scheme are lower than in the annuity linked scheme. The payment though is tax-free in your hands.
The RML enabled Annuity scheme is a significant improvement over the normal RML scheme. It offers life-long annuities, has better payouts, and offers certainty in terms of periodic payments.
Annuities continue even if the house value drops below the outstanding loan amount. If you decide to go in for reverse mortgage, it is better to consider the RML enabled Annuity scheme. But given the better benefits, you may have to repay more towards loan outstanding to retrieve the property under the annuity scheme. Make sure you understand terms and conditions before entering into any reverse mortgage arrangement.
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