ATM :: Why reverse mortgage has failed to take off in India

By Sanjeev Sinha, ECONOMICTIMES.COM | 10 Dec, 2014, 11.57AM IST | Economic Times
Reverse mortgage has proven to be a very effective tool to supplement one’s income in old age, particularly in Western countries like the United States. However, despite being introduced 7-8 years back in India, it has failed to take off the way industry experts had hoped.

But before finding out the reasons, we need to take a look at what reverse mortgage is all about.

Reverse mortgage, in fact, is a special type of loan against a home that allows the borrower to convert a portion of the equity in the property into cash. In simple words, reverse mortgage is a scheme where any individual (senior citizen) who has a self-occupied house and is looking for regular income can mortgage it to a financial institution. In return, the institution pays the person a fixed periodic (monthly, quarterly, annual) installment or a lump-sum amount at a defined rate of interest.

“The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be,” says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.

With a traditional second mortgage, or a home equity line of credit, one must show sufficient income versus debt ratio to qualify for such a loan, and needs to make monthly payments towards the mortgage. However, reverse mortgage pays the borrower, and is available regardless of current income or assets.

“The amount that can be borrowed depends on the borrower’s age, the current interest rate, other loan fees, and the appraised value of the property. One does not have to make payments, because the loan is not due for paying off as long as the house is one’s principal residence. However, like all homeowners, the borrower is still required to pay applicable real estate taxes and other conventional payments like utilities,” says a Jones Lang LaSalle (JLL) India report.

Thus, as it is clear, unlike the other lines of credit, reverse mortgage doesn’t require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. Also, “in reverse mortgage, the borrower doesn’t have to pay principal or interest payments during the loan tenure (15-20 years). More importantly, the amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner,” informs Chintan Patel, director-real estate practice, Ernst & Young.

However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.

Anuj Puri, chairman & country head, JLL India, says, “In the first place, it is a predominant tendency for Indians 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 importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years.”

Echoing similar views, Patel says that property ownership in India is considered as an inheritable subset, which is ideally handed over to the legal heirs. Also, the owned property is considered for trade unless there is a substantial benefit or imperative financial crisis of owner.

Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh – Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.

The structure of the product is also cited as the main reason for its unacceptability in India. In fact, when launched, it was a loan from a bank for a fixed term up to 5-20 years. There were also a few disadvantages in this product. Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan.

“This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter,” says Jitendra Solanki.

Another thing is that most Indians have erroneous perceptions about reverse mortgage as the product itself is not as well understood in India as traditional home loans are. “The fault probably lies with the banks, who should be trying to educate their clients on what reverse mortgage does and does not mean. For instance, it does not mean that the property is irretrievably pledged to the bank. Also, the guidelines surrounding the product need to be made more attractive so that more people see it as a viable option. Senior citizens should see it as a workable fallback option when finances are a constraint. After all, the loan can be paid back and the ownership of the property can be reverted to the owner,” informs Puri.

Other remedies to make the product more acceptable in India include providing some flexibility in the age group of borrowers. In Indian context, for instance, with average life expectancy of seniors at 65 years (census- 2011), such product is less accomplished and preferred due to the restricted period of benefits out of the product for borrowers.

“The lender can develop reverse mortgage product with flexibility in the age group with eligibility criteria starting at 50-55+ age group,” says Patel.

Also, the lender should define products and modulations in the offerings with flexibility in the pay-out structures such as increasing the cap limit of loan based on city/tier specific ownerships.

The product also has certain limitations. For example, reverse mortgage decreases one’s home equity compared to the usual case, as with every payment that the bank provides, equity in the house decreases. Also, “post owner’s death, if the house sells for less than the balance loan amount, the lender have to bear the loss as the same is a non-recourse loan,” observes Patel.

One pre-condition for availing loan under reverse mortgage is that the property mortgaged to the bank should also be self occupied with regular payments facilitated by house owner towards property tax, insurance and repairs, and is not allowed to be rented out until the loan is fully repaid.

However, despite these limitations, reverse mortgage in the Indian context makes sense for elderly persons owning residential property who, for whatever reason, have no other dependable financial recourse. Also, there are instances of severe rifts within the family which can give an elderly person to choose to encash rather than bequeath the property.

Finally, reverse mortgage can be used as a temporary fallback option. In other words, reverse mortgage can be availed of for a certain amount which can then be paid back in a predictable period so that the ownership of the property is returned to the owner.

Industry experts say that reverse mortgage schemes have already proven to be a very effective tool to supplement old age income in the Western countries. So in India also it can be made successful by proper marketing of the product, and increasing the tenure of the loan to life time as opposed to the 20 years limit now.

True, reverse mortgage initially did not find many takers as it was a loan product from banks with a fixed term payout. The payout was also very low and so not attractive enough. Thankfully, to bridge the said gap and make it more appealing and beneficial, some banks in association with some life insurance companies have now come out with Life Time Annuity Product where banks give a loan up to a specified value of the house and purchase life time annuity for this amount from insurance companies. The annuity is much higher than the fixed-term product and is payable to both the husband and the spouse. The annuity is paid by the company through the bank directly to the borrower’s account.

“Initially this annuity was taxable, which was again a drawback. However, making it tax-free recently has been the most attractive decision for reverse mortgage buyers. Now one can avail a tax-free life-time annuity from the respective bank under a reverse mortgage scheme,” says Solanki.

Hopefully, with life-time tax-free annuity, the product may see some acceptance from the retirees in India too!

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