Indians should shed sentiment, use reverse mortgage for sunset years

Indians should shed sentiment, adopt reverse mortgage for sunset years

The concept of reverse mortgage has its origins in the US world of financial engineering. A person aged 62 or more can avail himself of this facility provided he has some equity (market value minus loans and other dues) from his residential property.

Normally, home loans involve a mortgage of the property to acquire it in the manner of ‘buy now pay later’ (BNPL). In a reverse mortgage, the mortgage is done after acquisition of the property. It is typically found useful by senior citizens past their prime and on whom usually employers shut their doors. Pensionable jobs normally do not leave senior citizens pining for liquidity. It is the vast majority condemned to live without support during their sunset years who need to reverse mortgage their properties either for a lump sum or periodic payments.

Popular among US elders

Such loans are not repayable during their lifetimes unless the property is sold off, but the interest keeps ticking as usual and gets added to the loan amount. On the borrower’s death, the legal heirs can come forward and pay off the entire dues and take back the title deed or else the lender sells the property, recovers its dues and hands over the balance, if any, to the legal heirs.

The longevity (life expectancy) risks and market risks (market value plummeting below the amount due on maturity of the loan) are assumed by the US government much to the relief of the lenders, thus making the scheme hugely popular.  According to the National Reverse Mortgage Lenders Association, homeowners aged 62 and more held $10.19 trillion in home equity in the third quarter of 2021. The number marks an all-time high since measurement began in 2000, underscoring how large a source of wealth home equity is for retirement-age adults.

Indian scheme a non-starter

The Indian experience is nothing to write home about. Launched in 2007 without fanfare, the SBI scheme has been practically a non-starter with just a few thousand takers. Other public sector banks (PSBs) have got a less flattering response. To be sure, the Indian government has spared the cash flows from reverse mortgage from income-tax, taking a cue from the US government, but that has not endeared the scheme to our seniors.

In India, a person who is 60 and above – and in case of joint loans through reverse mortgage, whose spouse is 58 and above – is eligible provided the mortgage property is not rented but self-occupied. The loan tenure is 10-20 years, during which there are no EMI or other repayment obligations. 

The interest (SBI charges 8.05% from its pensioners and 9.05% from outsiders subject to revision), however, keeps ticking. The maximum loan amount is Rs 1 crore. The loan-value ratio varies between 60 per cent and 80 per cent.  If the property is valued at Rs 2 crore, the loan at the minimum of the scale could have been for Rs 1.20 crore but thanks to the cap, it can never exceed Rs 1 crore.

Lacunae in the scheme

Why has the scheme turned out to be a damp squib in India?  The answers are not far to seek. First, lack of guarantees as in the US. A retiree at the age of 60 may stare repayment in the face after say 15 years on maturity of the loan if he outlives the tenure of the loan, as is most likely, given the lengthening longevity in the country.  Second, the ridiculously low cap of Rs 1 crore on the entire outstanding.  Third, lack of publicity of the scheme with PSBs preferring to keep a low profile on this score, almost under wraps.

The final reason is the most important one. Indian elders, unlike their US counterparts, have a deep sense of attachment with their offspring even if they go wayward. Tears well up in their eyes at the mere thought of their children. They dare not burden them with a heavy financial liability after their demise. Many of them wince at such a thought. Instead, they daydream about leaving a treasure trove for them. Their cloying sentimentality is of a piece with the emotional attachment our women have for the mangalsutra, rendering our gold monetisation scheme (GMS) a non-starter. 

Americans are not torn apart by such sentimentalities.  In fact, long ago, they learnt to move out of parental homes, at the age of 18.

Unlocking value

The UPA government towards its end was mulling a law to discipline children not taking care of their parents in their autumn years. The NDA government should, instead of indulging in such grandstanding, make the reverse mortgage scheme meaningful. Unlocking value or converting an innately illiquid asset into liquid is an art our elders have not perfected.

In Tamil, there is a saying which loosely translated means: bemoaning the lack of ghee when butter is available! An immovable property is ‘butter’ that can be ‘liquified’ into ghee i.e., regular income streams. A meaningful and riveting ad campaign can bring around the elders almost serendipitously. 

With health insurance proving elusive for them, senior citizens would latch onto the reverse mortgage lifeboat in a medical emergency, especially one that strikes them at fairly regular intervals.