In our previous article we have explained about the Reverse Mortgage Loan (RML) Scheme, which offers regular income to senior citizen against pledging of their home with the lender. However, the RML product has not met with much success, because the scheme is not as supportive as expected to old age people. This is for the reason that mortgagee bank guarantees regular income to mortgagor only up to the loan tenure (maximum tenure in Reverse Mortgage is 20 years). Beyond the tenure of the loan, the flow funds will stop and there may not be any regular source of income to the mortgagee borrower. Further, the conservatively considered payment of annuity offered by the banks under RML compared to life insurance companies is very low. In view of weakness in RML product, reverse Mortgage Loan enabled Annuity (RMLeA) plan has been introduced by the National Housing Bank with significant improvement over the initial RML product variant.
Under RMLeA scheme, the borrower will be offered to opt for monthly or periodic payments and accordingly Primary Lending Institution (Bank/HFC) would purchase annuity based policy from an Insurance Company (approved by IRDA) on behalf of borrower. The borrower has the option to instruct Prime Lending Institution (Bank/HFC) to remit eligible Loan quantum, in part or in full, to Insurance Company as Annuity premium. Thereby the periodic payment of annuity will be made by the insurance company to annuitant (borrower) by cheque or electronic transfer to a chosen account of the borrower in a scheduled commercial bank. Joint borrowers will have the option to instruct the PLI to source the Annuity separately in their respective individual names on a proportionate basis that they may decide.
A borrower may also opt for one or more annuity options, subject to detailed terms of the Life Insurance Company and Prime Lending Institution (Bank/HFC).
Option 1: Constant Life annuity wherein no benefits will be payable on death of annuitant.
Option 2: Life annuity with return of purchase price on demise of the annuitant
Option 3: Increasing life annuity with return of purchase price on demise of the annuitant*.
In option 2 &3 the insurer needs to refund the purchase price to the bank to settle the principal part of the loan. In option 1, the insurer does not return the loan principal to the bank. However, the annuitant (borrower) will receive a higher amount of annuity payment in case of option (1). Such options exercised under RMLeA cannot be terminated, surrendered, or cancelled.
*In case of Joint borrowers under RMLeA (with Return of Purchase Price option), the annuity shall first be paid in the name of the primary borrower. On death of the primary borrower, the Primary Lending Institution (Bank/HFC) shall use the returned purchase price to re-purchase Annuity in the name of the second borrower at annuity rates applicable for his/her age at time of such re-purchase. The Annuity shall thereafter flow in to the second borrower.
The key dissimilarity between the RML scheme and RMLeA are as under.
| Scheme | RML | RMLeA | |
| Parties involved | Bank and Borrower | Bank, Insurance company and the Borrower | |
| Annuity Sourcing | Lender Bank | Life Insurance Company | |
| Loan to value ratio | Maximum 60% | Age of Borrower Maximum Loan to Value Ratio
Between 60 and 70: 60%
Between 70 and 80: 70%
80 and above: 75%
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| Maximum period of annuity payments | 20 years | Life time | |
| Quantum of annuity payment | Comparatively low | Comparatively higher | |
| Revision of annuity payment at the discretion of the bank | Revaluation of the property | Revaluation of the property plus Bonus additions by the insurer | |
| Lump sum payment | Maximum 50% of value of the property (Loan amount). |
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| Due date of the Loan | The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out.
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The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out. | |
| Closure of loan | From sale proceeds of the mortgaged property on death of the borrower and survivor spouse. Loan can also be closed before or after the death of the borrower by legal heirs of the borrower. | in the case of RMLeA, the house property is used only towards the realization of the accumulated interest amount whereas the principal amount of the bank remains intact with the insurer which would be refunded at the time of the death of the borrower | |
| Applicability of Tax | All payments under reverse mortgage loan are exempt from income tax under Section 10(43) of the Income-tax Act, 1961. | The periodic annuity payments are subject to tax under Section U/s 17, 56 and 80CCC of the Income Tax Act, the amount of annuity received taxable in the hands of the annuity recipients.
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