Thursday, December 17, 2009

Get higher returns and life-long income too (Reverse Mortgage)

Like mystery novels, the end is chilling! -- PVM

Get higher returns and life-long income too

Central Bank of India and Star Union Daiichi Life Insurance have
launched a life-long reverse mortgage annuity called CENT Swabhiman
Plus. Through this product, a senior citizen can earn a
monthly/quarterly /half yearly or annual income as mutually agreed by
the borrower and the bank against his/her home. The annuity continues
till the individual survives.

This is a tweaked version of the earlier reverse mortgage scheme,
under which the annuity payment would stop in 20 years although the
individual could reside in the house till death.

But after receiving feedback about insufficiency of a 20-year cap on
annuity payments, NHB had asked banks and insurance companies to
design a product to provide a life-time annuity to senior citizens.

This product also promises a higher return. Insurers have computed the
annuity using mortality charts whereas banks discounted the property
value at a specific rate to calculate the payouts. Also, the interest
rate on the revised reverse mortgage product offered by the Central
bank of India is 9.5%, (subject to reset at the end of two years from
the first drawdown) against 12.5% charged on a regular reverse
mortgage product, resulting in higher payouts.

There are two variants within this product. Under the first option,
the annuitant receives a life annuity at a constant rate till he
survives. In the other, the annuitant will receive annuity for life
with return of purchase price on his death. This product is available
for senior citizens above 60 years of age.

In case of co-borrowers, at least one of the borrowers should be above
60 and the other should be above 55 years. Also, the owned property
should be free from any encumbrances. The bank will lend up to 60-75 %
of the value of property.
One of the main advantages of the scheme is it provides a lifetime
income stream, which could be used for their financial needs, be it
house renovation, medical and other personal purposes.

The borrower can also opt for 25% of the loan amount (maximum amount
capped at Rs 15 lakh), which can come in handy in case of

However, the bank doesn't encourage the borrowers to use this money
for trading and speculative purposes. The ground has been just set by
the state-owned bank for reverse mortgage annuity products in India.

But even as all payments under reverse mortgage loan are exempt from
Income Tax under Section 10(43) of the Income-Tax Act, 1961, the
monthly or periodic annuity payments are defined as 'salaries'.

Hence, it is taxable in the hands of the senior citizens under Section
17 of the I-T Act. Any amount received as a loan either in lumpsum or
instalments under such scheme, is also not regarded as income and
hence, not liable to income tax.

Also, the bank reserves the right to foreclosure of the annuity if the
borrower has not stayed in the property for a continuous period of one
year. This could be an issue for a senior citizen if s/he has to move
in with his/her son/daughter because of an ailing health or any other

Why go for it:

It provides an income stream to the senior citizen till she/he is alive.

What is the catch:

The annuities are taxable in the hands of senior citizens. Also, the
bank reserves the right for foreclosure of the annuity if the borrower
has not stayed in the property for a continuous period of one year.
Source: ET 14th Dec 09

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