Mumbai: “Due to poor financial literacy and extremely high property prices in India (relative to the income levels), millions of savers are likely to retire with a large chunk of their savings locked up in the apartments that they live in,” says a report by the MoneyLife Foundation, dealing with the issue of reverse mortgage, the knowledge of which would come in handy for house owners.
The report says these a buyer of a house “may not be poor in terms of net worth, but would not have the cash required to meet the rising cost of retirement living. In other words, they would be asset-rich but cash-poor”.
This is where, the report asserts, reverse mortgage is useful.
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A reverse mortgage is a type of house loan for older owners that requires no monthly mortgage payments but gives them a monthly payment instead.
According to Census 2011, there are nearly 104 million elderly persons (aged 60 years or above) in India, including 53 million females and 51 million males. A report released by the United Nations Population Fund and HelpAge India suggests that the number of elderly persons is expected to grow to 173 million by 2026. The Indian government sees elderly population crossing 340 million by 2050.
Reverse mortgage, an obvious product targeted at India’s often asset-rich and cash-poor, aging and senior citizen population, needs to be made more viable by improving product design and structure, the report prepared by the foundation that runs a magazine of personal finance prescribes.
The MoneyLife Foundation report says it is an international practice that the government bears part of the risk (easily covered through an insurance product) as a social security initiative and puts in place a strong regulatory mechanism, including protection to borrowers, from unscrupulous lenders.
The above are some of the key findings of the “Report on Reverse Mortgage” prepared by MoneyLife Foundation, which was released by Hardeep Singh Puri, Union Minister of State for Housing and Urban Affairs (Independent Charge), last Saturday.
The report was released at a function at the Bombay Stock Exchange (BSE) International Convention Centre to mark the 9th anniversary of MoneyLife Foundation, which is a non-profit organisation boasting of about 98,000 members from across the country and abroad. It is engaged in spreading financial literacy, consumer awareness and advocacy and works towards safe and fair market practices through workshops, round table meetings, white papers, research, awareness campaigns, and grievance redressal and counselling, the foundation’s press release informs.
The Housing Development Finance Corp (HDFC) supported the research on reverse mortgage. Two bankers, Shrinivas Marathe and Pradeep Bhave did the research for the report.
The report includes
- the demand and supply scenario
- analysis of the currently available reverse mortgage products
- analysis of the present regulatory framework
- misconceptions about the scheme and incentives required to make reverse mortgage a popular product for both customers and banks, and
- how reverse mortgage schemes can be made affordable and popular among borrowers and lenders.
Main findings of the report
- It is difficult to evaluate the reliability and effectiveness of all the schemes by various lenders as these have been in existence only for the last 10 years or so.
- None of the loans under the schemes have come to a stage of ensuring security as yet.
- The response and behaviour of the legal heirs of houses is not tested to get an idea of the extent to which repayment in this manner would be acceptable to them.
- In most cases, however, where the loan-to-value (LTV) is less than 100%, it can be safely assumed that the house heirs would be more than glad to settle the loan if they are financially sound.
- Whereas the risk to the lenders of the loan amounts exceeding the value of security (LTV in excess of 100%) reduces with a drop in interest rates, the borrowers benefit with higher annuity payments.
Whether it is China, UK or India, the report finds, the psychology of the seniors remains the same: “Leaving legacy to the next generation”. This thinking is preventing this section of the society, susceptible to financial woes, from exploring the power of their hard-earned asset, their house, from supplementing their income in case of need.
Therefore, what is the solution?
‘Must do’ for house owners, government
It is an established fact that the reverse mortgage scheme has not attracted as much attention of the borrowers as it was expected to, the press release says. The lenders have given a cold shoulder to the reverse mortgage scheme due to several risk factors to themselves. Under the circumstances, some introspection is needed both by borrowers and lenders to make reverse mortgage schemes work, since the product is important for India’s ageing population, recommends Money Life.
The report suggests some new designs of reverse mortgage products that are suitable for Indian conditions.
A little more acceptability of the reverse mortgage loan scheme can be brought about with the implementation of these suggested modified schemes.
- Discounted monthly payments rising yearly or with other suitable periodicity
- Reverse mortgage with reduced payout to the surviving borrower till death
- Line of credit can be provided to borrowers
- Reverse mortgage with share in future gains in property value
- Reverse mortgage in tranches (This is an attempt to introduce an actuarial element in the scheme without involving an insurance company)
- Reverse mortgage with a periodical review of payouts concurrently with property valuation
- Insurance for shortfall in property value to cover reverse mortgage loan
- Interest subvention by government
- Reverse mortgage with payouts or part of the loan for a house funded by the government
- Raising the eligibility criteria for age of the borrower
The government, the report advices, should be actively involved in this product and needs to do a lot in this regard from the social security angle. Unfortunately, except for a couple of amendments in the income tax law, the government seriously lacks on the legislative front.
The government has to initiate action on the front of passing laws for protection of the borrowers from unscrupulous lenders, particularly because the scheme deals with property matters.
The government has to put a strong regulatory mechanism in place too, the report insists.