Life expectancy in India has increased substantially over the last one decade. Thanks to advancements in medical science along with improved healthcare facilities. However, an increased life expectancy has also led to an increase in geriatric population of the country. According to the Ministry of Social Justice and Empowerment, the number of senior citizens in India (above 60 years) is projected to rise to 14.3 crore in 2021 and 17.3 crore in 2026. Courtesy, a drastically advanced healthcare segment that has ensured senior citizens not only live longer, but are able to maintain a healthy lifestyle, thereby enjoy a more productive life.
However, with changing times, societal norms have also undergone major modifications. Traditional joint families have given way to nuclear ones. Today, its common to see children settled elsewhere while their elderly parents choose to hold on to their roots. Needless to say, loneliness is increasing among senior citizens and many of them often end up facing crisis owing to a lack of proper financial retirement support.
Keeping in mind, this section of the populace, especially those senior citizens who are homeowners but do not have any other source of income, the then government introduced the system of reverse mortgage loans in 2007. Quite popular in western countries, a reverse mortgage loan is a form of credit where the bank or the financial institution pays a fixed instalment against the equity of the home owned. Simply put, in this scenario, the applicant mortgages his or her house to a financial institution or bank and against the same, receives a certain amount of money either as a lump sum or on the basis of instalment.
Sharing his views on the benefits of a reverse mortgage loan, Sanjay Chaturvedi, CEO, Shubham Housing Finance, said, “This is best suited for Senior citizens whose children either live abroad or in different cities and do not intend on living in that house.”
As far as eligibility is concerned, a homeowner, above 60 years of age is eligible for a reverse mortgage loan. It allows him to turn the equity in his home into one lump sum or periodic payments mutually agreed by the borrower and the banker. There are two types of reverse mortgage loans available to the customer, Regular Reverse Mortgage and Reverse Mortgage Loan-enabled Annuity (RMLeA). Commenting on the benefits of the reverse mortgage loan, Raj Khosla, Founder and MD, MyMoneyMantra said, “The reverse mortgage is best suited to senior citizens as the amount received works as a supplementary retirement income and allows them to lead a lifestyle of their choice.”
In case of an RMLeA, the bank purchases the annuity plan and pays out the principal amount to the insurance company. Here, the bank becomes the master policyholder and the borrower the annuitant. “The insurance company schedules the repayment plan and sets the annuity benefit that will be paid at regular intervals to the annuitants. The insurance company returns the bonus in case ROI from investment of purchase price is over six per cent,” explained Khosla. Usually, the tenure of RMLs ranges from 10-20 years. According to National Housing Bank (NHB) scheme the maximum tenure of the loan is 15 years. However, when it comes to residual life of the property, it should be at least 20 years.
Further commenting on the functionalities of the reverse mortgage loan, experts said, when the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy the property. The applicants should be the owner and self-occupying the mortgaged property as a primary residence. Vacant homes and investor properties are not eligible for RML. Activities like house repairing, payment of taxes and insurance are the sole responsibility of the applicants. On the other hand, regular charges such as documentation fee and processing fee would be deducted. However, there is no prepayment charge levied. When it comes to the loan amount, it is based on various factors such as borrower’s age, property value, prevalent interest rates, and the chosen plan. Older the borrower, higher the amount is available. Although the reverse mortgage loan can be raised by up to 90 per cent of the property value, generally the loan is granted for 50 per cent to 60 per cent of the property value.
Explaining the dynamics of the property value, Khosla said, “The RBI has fixed a minimum limit of `3 lakh and a maximum limit of `1 Crore for this product. After every five years, the lender will appraise the property and can reassess the repayment amount according to the present market value of the property.” The lender would initiate the property valuation based on market value. Depending upon the assessed value, age and requirement, the lender would share the plan. Experts are of the opinion that the, valuation of the residential property is done at periodic intervals and it shall be clearly specified to the borrowers upfront. “Banks shall have the option to revise the periodic or lump sum amount at such frequency or intervals based on revaluation of property,” explained Pankaj Mathpal, MD, Optima Money Managers.
The loan does not become payable during the stipulated tenure, unless the applicant dies or he or she chooses to sells the house or moves into another property. “In case the property owner dies, the legal heirs can choose to repay the loan and reclaim the property. Else, the bank would take the control of the asset and initiate a property sale to make for the delinquency,” highlighted Khosla. In case, the sale of property earns more than the loan amount, the excess is handed over to the legal heirs. A tax on capital gains is applicable. On the other hand, if the property is sold at lower than loan value, the bank will bear the loss. The borrower can opt for prepayment of the reverse mortgage loan any time during the tenure. There is no prepayment penalty on reverse mortgages.
Interestingly, despite certain benefits, as a product, the reverse mortgage loan has failed to strike a chord among customers. There are multiple reasons as to why reverse mortgage loans have remained unpopular. The foremost reason being that Indians tend to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation and would be liquidated only as a last resource. Also, the elderly tend to hold a place of high significance in the Indian culture. Often, property-owning senior citizens are usually assured of care and support in their sunset years.
Traditional mindset of the populace is yet another reason for the unpopularity of reverse mortgage loans. Indians usually pass on assets to the next generation, which leads to holding on to their equity till death. Also, in most cases, since income during old age is taken care of by children, the need to have an additional source of income to support old age rarely arises.
Apart from cultural hues, certain other reasons are also attributed for the low popularity of this loan. Reverse mortgage loan as a product is not yet fully understood by custmers as traditional home loans are. Senior citizens mostly find it a complex product and hence refrain from availing it. And some are not even aware that such a loan even exists at all.
Experts further state that, certain aspects of the loan such as interest rates and repayment method have posed challenges in developing a comprehensive product for the Indian markets. “Due to the variation on deciding the repayment capacity, asset appreciation rates over the period of 15 years, lack of uncertainty among legal heirs, this has traditionally led to difficulties in designing a holistic product for the Indian market,” as pointed out by Chaturvedi.
Above all, Indian cultural mores seem to be a major deterrant for the popularity of such a product. As compared to western countries, many families in India still continue to live together. Seniors mostly prefer to live with their children and pass on property to next generation. Thus, a product like reverse mortgage loan does not receive too many queries in India. Further, those who apply for such loans are mostly the ones who have low cash and high dependence on lender’s payment to make the ends meet.
“With too many reverse mortgage loan applications in the West, a ‘subprime’ type of bubble is feared by many economists. It is a valid concern that unscrupulous lenders may take advantage of the rather weaker and vulnerable section of borrowers who happen to be old age pensioners,” said Khosla.
However, experts believe that with due diligence, the benefits of a reverse mortgage loan will outweigh the risks involved. It indeed is a unique product, which extends a great amount of financial freedom to senior citizens.
himali@outlookindia.com