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Following clarification from the government on tax treatment, Union Bank of India has decided to offer reverse mortgage scheme to its customers at competitive rates. The bank has decided to charge 10% and maintain a margin of 30% on the scheme.

The finance minister had urged public sector banks to offer reverse mortgage scheme in Budget 2006-07. However, banks were awaiting clarity on tax-related issues before launching the scheme. Recently, the government proposed in the budget that loan taken by senior citizen will be exempted from tax and there will also be a waiver on the capital gain tax.

Under the reverse mortgage senior citizens can consider earning a monthly income by pledging their home with a housing finance company or a bank even while they continues to occupy the house for lifetime. The borrower is not required to service the loan during his lifetime or make monthly payments. On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. Alternatively, the borrower or its heir can repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

Currently, SBI has a margin of only 10% but it is charging 10.75%, Punjab National bank is charging 10% and a margin of 20% and Allahabad Bank is charging 11% and a margin of 40%. All banks are charging fixed rate subject to a reset after five years. Also, the monthly instalment paid to the customer will factor the interest component. Among non-banks LIC Housing Finance and Dewan Housing have announced their reverse mortgage schemes.

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