Why Reverse Mortgage failed in India
Reverse mortgage is a special loan against home that allows the borrower to convert a portion of equity in the property to cash. That means any individual who has a self-occupied house can mortgage it with a financial institution for regular income. The financial institution will pay the individual a fixed periodic installment or a lump sum amount at a specified rate of interest.
The pay-out is for 15-20 years, the borrower can then repay the loan and then settle it. If the borrowers fails to make the payment, the financial institution will sell the house and settle the amount. If there is any excess amount earned on the sale of the house it is paid to the borrower. Reverse mortgage loan amount is paid to the borrower regardless of his current income, his credit history or the assets that he has. The amount offered however depends on the borrower’s age, other loan fees, the interest rate and the property’s appraised value.
The reverse mortgage amount that you receive from the lender is not taxable as it is considered as loan and not income with ownership fixed. Despite all the benefits, it failed to attract the Indian audience. The main reason being that the home they own is an important family asset and is to be inherited by the next generation and there is no way they would risk losing it. The reverse mortgage loan amount is capped at Rs.50 lakhs to Rs.1 crore and to get that amount on properties located in metro cities is less profitable for the borrower.
The structure also seemed to be another big reason for its failure in India as it was launched for a fixed term of 5-20 years. The other reason was that there was no lifetime income involved for the retirees and they would not be able to repay the loan due to the lack of income. Losing a house over the income offered seemed like a huge risk. Also the attachment to their house did not let many to take the reverse mortgage.
Another major factor was that most people did not understand the concept itself. The banks were unable to educate their clients. They were unable to tell the clients that the reverse mortgage is not an irretrievable pledge to the bank.
The product does have its limitations as the mortgage decreases a person’s home equity. If the owner dies, and the heir is unable to pay the loan, and the bank decides to sell the house for a lesser value, the lender will be bearing the loss as same as in a non-recourse loan. Another prerequisite is that the home must be occupied by the borrower itself and the owner/ borrower must pay the property tax, insurance and repairs. The owner will not be allowed to rent the house out until the loan is paid off.
Reverse mortgage make sense for elderly people owning a house and who have no reliable source of income. It can be used as a temporary fall back option and can be availed for a limited cash that you know you can repay in the given time frame. It is just that it needs to be marketed well and it will resolve the financial conditions of the elderly who have a house.
The product did not do so well when it was first introduced but it can be marketed well and the borrowers can be informed about all the pros and cons. There are some life insurance companies that have introduced a lifetime annuity option. The annuity is payable by both the husband and the wife. Hopefully this will attract more retirees to make use of this product and become financially independent.