Indians should shed their feelings and adopt a reverse mortgage for the sunset years
The concept of reverse mortgage has its origins in the American world of financial engineering. A person aged 62 or over can avail this facility provided they have a certain equity (market value less loans and other encumbrances) in their residential property.
Normally, home loans involve a mortgage on the property to acquire it in a ‘buy now pay later’ (BNPL) manner. In a reverse mortgage, the mortgage is made after the acquisition of the property. It is generally found useful by older people after their prime and to whom employers usually close their doors. Pensionable jobs don’t normally leave seniors looking for cash. It is the vast majority of those sentenced to live without support during their sleeping years who need to mortgage their properties either for a lump sum or for periodic installments.
Popular among American seniors
These loans are non-repayable during their lifetime unless the property is sold, but interest continues to accrue as usual and is added to the loan amount. On the death of the borrower, the legal heirs can come forward and repay all the rights and take back the title or the lender sells the property, recovers its rights and returns the balance, if any, to the legal heirs.
Longevity risks (life expectancy) and market risks (market value falls below the amount owed when the loan matures) are assumed by the US government much to the relief of lenders, making the program extremely popular . According to the National Reverse Mortgage Lenders Association, homeowners ages 62 and older held $10.19 trillion in home equity in the third quarter of 2021. The number marks an all-time high since the measure began in 2000, underscoring the importance of a source of wealth. is aimed at adults of retirement age.
Indian diet a non-starter
The Indian experience is not exciting. Launched in 2007 without fanfare, the SBI program has been virtually a non-starter with only a few thousand takers. Other public sector banks (PSBs) got a less flattering response. Certainly, the Indian government has spared the cash flow of the reverse mortgage from income tax, taking inspiration from the US government, but this has not endeared the scheme to our elders.
In India, a person aged 60 and over – and in case of joint reverse mortgage loans, whose spouse is 58 and over – is eligible provided the mortgaged property is not rented but self-occupied. The term of the loan is 10 to 20 years, during which there are no EMIs or other repayment obligations.
The interest (SBI levies 8.05% on its retirees and 9.05% on foreigners subject to review), however, continues to rotate. The maximum loan amount is Rs 1 crore. The loan-to-value ratio varies between 60% and 80%. If the property is valued at Rs 2 crore, the scale minimum loan could have been Rs 1.20 crore but thanks to the ceiling, it can never exceed Rs 1 crore.
Gaps in the scheme
Why did the system turn out to be a wet firecracker in India? The answers are not far to seek. First, the lack of guarantees like in the United States. A retiree at age 60 can face repayment after, say, 15 years from loan maturity if he survives the loan term, as is very likely given increasing longevity in the country. Second, the ridiculously low ceiling of Rs 1 crore on the whole outstanding. Third, the program’s lack of publicity, with PSOs preferring to keep a low profile on this point, almost covertly.
The last reason is the most important. Indian elders, unlike their American counterparts, have a deep sense of attachment to their offspring even when they wander off. Tears in their eyes just at the thought of their children. They dare not burden them with a heavy financial liability after their disappearance. Many of them wince at such a thought. Instead, they dream of leaving them a treasure. Their honeyed sentimentality goes hand in hand with the emotional attachment that our women have for the mangal sutra, making our Gold Monetization System (GMS) a non-starter.
Americans are not torn by such sentimentality. Indeed, a long time ago, they learned to leave the parental home, at the age of 18.
Towards its end, the UPA government was considering a law to discipline children who did not care for their parents during their autumn years. The NDA government should, instead of indulging in such grandstanding, make sense of the Reverse Mortgage Scheme. Unleashing value or converting a naturally illiquid asset into cash is an art that our elders have not perfected.
In Tamil, there is a saying whose approximate translation means: lament the lack of ghee when butter is available! Real estate is “butter” that can be “liquefied” into ghee, ie steady streams of income. A meaningful and captivating advertising campaign can attract seniors almost by chance.
With health insurance proving elusive to them, seniors would cling to the reverse mortgage lifeboat in the event of a medical emergency, especially when it hits them at fairly regular intervals.