How The Reverse Mortgage Plan Can Help India’s Asset-Rich And Cash-Poor Senior Citizens

Senior citizens in India face many challenges – social changes that impact family structure, health issues, longevity and a lack of support service system. While many issues are not easy to fix, focusing on the one that could be simple to fix – providing products that cater to their needs – could be a good start. But, the unfortunate fact is that one potentially promising product for asset-rich, cash-poor senior citizens – reverse mortgage – has had no takers due to poor incentives and complex implementation.

Real Need

Data from a Reserve Bank of India paper, published about a year ago, notes that the average Indian household holds 77 per cent of its wealth in real estate and only 5 per cent in financial assets. Also, 77 per cent of Indian households either do not expect to retire, or have not actively planned for retirement. Over the coming decade and a half, the elderly people are expected to grow by 75 per cent. Only a small fraction of this segment has saved in private pension plans. “Our results suggest that later in life, and especially during retirement, it is optimal to use products that resemble a reverse mortgage arrangement," noted the report.

Given the shortage in savings and the heavy savings in real estate, a product that lets people monetise their home would be welcome. Reverse mortgage is a simple idea that addresses the issue. In this, a senior citizen can pledge his or her home with a bank and get regular income. Think of it as a bank giving a loan that is spread over a period – typically between 15 to 20 years – based on the age of the borrower, with the home as a collateral. Senior citizens can get a lump sum amount as well and continue to live in the home and the loan can be repaid to redeem the home or paid by selling it after the lifetime of the borrowers.

The scheme has been a big success in many countries. This segment in the UK – called the equity release mortgage – grew 34 per cent in 2017 to about £2.2 billion, and the market in US is estimated to be over five times larger. These countries have also seen issues in the product. For example, larger banks in the US stopped reverse mortgage product in 2011. In the UK, the enthusiasm in 1980s waned as costs were high and borrowers ended up in negative equity. But the product has been redesigned and has seen better uptake now.

Indian Issues

Granted, the product is complex as it straddles multiple domains – real estate, loan and annuity. It is also a long-term commitment. Hence, there are a lot of uncertainties regarding property price and interest rates. As a result, the solution is sub-optimal. There are also legal issues and all these add to the cost of the loan and delay disbursements.

The Indian situation is quite bleak for reverse mortgage. Even large banks such as State Bank of India are not keen to promote the product as it often opens up a can of worms legally, not to mention the unease in dealing with established social norms.

For example, in a booming property market, the homeowner may feel that the equity in the home has increased and there is no benefit received. The home value is reappraised every five years and the borrower can get a higher payment. But in a falling market, the bank has the risk of not having enough value in the home to lend against. So, they tend to appraise the value conservatively and have a high margin (ratio of home value to loan).

Let us look at some numbers, based on National Housing Bank’s calculator. Say your home is worth Rs 75 lakh in the market. It maybe appraised at Rs 60 lakh and you may get a loan of Rs 36 lakh. For a 15-year tenure, at 11 per cent interest rate, all you will get is about Rs 8,000 monthly. This is low enough today, but pointless in say 10 years.

Many Muddles

Senior citizens can continue to live in the homes that is under reverse mortgage for their lifetime, but they get no payment beyond the tenure. The longevity risk – higher life expectancy that delays possession – is borne by the bank. This is a serious drawback for both the parties. This issue was addressed with insurance players stepping in and creating an annuity. The bank transfers the longevity risk to the insurance provider, who pays senior citizens for as long as they live. The result is an even more complex product, which is not easy to manage or explain. Plus, the taxability of annuities does not appeal to this tax-sensitive segment.

The product also places many restrictions on the borrower. The owner must continue living in the home and cannot move out. They cannot even rent out a portion of the house. There are also legal hassles in getting a loan with declaration from legal heirs, and the will being rewritten to include the reverse mortgage.

Real Remedies

Despite its shortcomings, the need for the product is real. And, unlike the retirees of the past, who had a pension, the share of pensioners would only decrease over the years and the need for regular income solutions to senior citizens will only grow substantially. With the ageing population and rising cost of healthcare, policymakers cannot leave it to the individuals to figure out solutions, as there are practically none. For example, say a homeowner sells and invests the cash in annuities. With high inflation, the amount you would receive as fixed payment after a decade would not help ends meet. Some good products are needed here that offer low-risk and inflation-adjusted income.

Finding ways to enhance reverse mortgage would be ideal. For example, the many restrictions placed on renting can be removed and the product can also be positioned as a line of credit available in case of emergencies.

But the real crux is in the legal tangle. Real estate is rife with many legal issues on ownership. Not just for reverse mortgage, but in general, finding technology solutions to streamline property documentation would help reduce costs and delays in transactions and loans.