“It’s time has not yet come in India,” says Srinivas Acharya, Managing Director of Chennai-based Sundaram BNP Paribas Home Finance Ltd, matter-of-factly. That sums up the status of the reverse mortgage scheme in India.
So, just what is the reverse mortgage? It’s a scheme for senior citizens (60-plus in the case of men, and 58 in the case of women) who own a house but have a less than adequate income stream to make ends meet. If the house is free of encumbrances and with a clear title deed, the senior citizen can use the reverse mortgage scheme to convert the equity in the home into either a lump sum or periodic payments. In other words, they can use the house during their lifetime to bolster their income stream.
It’s a kind of ‘reverse loan’. Here, the EMI (equated monthly instalment) is not paid by the senior citizen. Rather, the lender pays the EMI. The loan becomes due only when the last surviving borrower (among the spouses) die or when the borrower decides to sell the house.
Upon the death of the house-owner (borrower, in this instance), the legal heirs have the option either to retain the house by paying up the loan or settle the debt by selling the house.
Security angle
Under the scheme, formulated by the National Housing Bank (the nodal agency or regulator for housing finance companies), the loan period for reverse mortgages is 15 years. It has a few riders, though. For one, it stipulates that the residual value of the house should be at least 20 years. For another, it also puts a cap on the loan amount (at 60 per cent of the value of the property). Finally, the lender re-evaluates the property value at regular intervals. What if the borrower lives longer than the stipulated period? Well, in that case, the borrower will not get the periodic payments but will be allowed to stay on in the house.
Along the way, the government has also stepped in to remove grey areas in taxation-related issues by making it clear that neither the lump-sum nor the periodic payments received on the loan will attract income tax or capital gains tax.
Reverse mortgage is quite a common way to “use your nest to help with your nest egg to round out a financial plan during retirement” as Wall Street said in a recent article. In the West, the concept of a family is quite different from what we see in India. Kids go their own way once they grow up, and don’t depend on the wealth of their parents.
Senior citizens can realise the locked-up value of their property by buying a reverse mortgage, thus ensuring a decent income stream after retirement even while occupying their own home.
Indian realities
The scene in India is quite different. Even as we moving slowly towards nuclear families, we are still steeped in the joint family tradition. Given this, the concept of the reverse mortgage has many miles to go, and a lot more hurdles to cross before gaining acceptance.
As Acharya argues, there is certain amount of stigma attached to the scheme. It puts senior citizens in a moral dilemma. Should I leave debt behind for my kids? Should I opt for debt at this point in time? Am I insulting my kids? Even as these moral questions pop up, the children too face uncomfortable issues. If the parents take this scheme, does it reflect on my ability to care for them?
These moral questions weigh on both sides heavily. This is the single biggest hurdle coming in the way of the reverse mortgage scheme. Old age homes faced similar stigmas when they first came here.
Nevertheless, their numbers have only grown in recent times. Change is inevitable, and it is being forced on society by many compulsions, including economic ones.
Reservations about reverse mortgage are bound to disappear with time. The move towards nuclear families, rising isolation of the elderly, and changing value systems are all slowly bringing about a metamorphosis in thinking. Wise retirees have opted for the scheme and used the lump sum to buy a smaller apartment in a gated community.
As family relationships slowly get redefined in India, the reverse mortgage scheme offers a welcome safety net for senior citizens. But for it to become truly popular, the government and banks need to tweak it and make it friendlier. That’s easier said than done. While a more reassuring approach to marketing could go a long way towards changing mindsets, it has to be accompanied by social change as well.
Quick Guide
Home owners over 60 are eligible
Maximum loan up to 60% of home value
Maximum tenure is 15 years
Monthly, quarterly, annual or lump-sum payments
Property is re-valued every five years
The sum received is not taxable
