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The government launched the product in India some eight years back but it has failed to take off, even though it can be a novel way to help cash-strapped senior citizens, whose sources of income are limited.
Reverse mortgage is a unique product for post-retirement days. It allows homeowners aged 60 and above to borrow against their home equity and receive either a lumpsum, a series of monthly installments or a line of credit that can be tapped as and when needed.
The debt does not have to be repaid until the borrower leaves the home by selling it, moving out or dying. In simple words, the product allows one to cash out his house property to financially support himself in his post-retirement days.
The government launched the product in India some eight years back but it has failed to take off, even though it can be a novel way to help cash-strapped senior citizens, whose sources of income are limited. The then finance minister P Chidambaram, who first announced the programme in the Union budget in 2007, clarified later that a reverse mortgage would neither be classified as transfer of revenue nor would it be treated as income, thereby sparing people from tax burden and thus making the product even more attractive.
So, what is reverse mortgage? A senior citizen older than 60 years can mortgage his house, which should have a clear title, and can use the equity in the house to get an income either as a lumpsum or as monthly payments or a combination of both for 15 years.
The National Housing Bank, a subsidiary of the Reserve Bank of India, is tasked with regulating the programme. Lenders, both banks and housing finance companies, have had limited success in tapping the reverse mortgage loan market, which is estimated to grow to nearly $113 billion (Rs 6 lakh crore) by 2017, according to one estimate.
However, some bankers say the product is not very compatible with India’s social environment, where real estate assets are bequeathed or left behind for the next generation. It cannot work unless it is used for further investment. Even if a senior citizen applies for a loan, his sons come forward and convince him to withdraw the application because in our society, sons are supposed to take care of ageing parents.
The amount you can borrow with a reverse mortgage typically declines with age. The older you get, the less you can borrow, which means people who wait may not be able to squeeze sufficient income out of a reverse mortgage.
That does not mean loans are always a bad idea. With the right planning and objective guidance, reverse mortgages can play a role in helping people through their retirement years. One can also set up a reverse line of credit and leave it unused to increase the amount of credit available over time.
A recent study in the US said reverse mortgages can help make a retirement portfolio last longer by allowing homeowners to tap their equity when the markets are down.
Retirees who often have to sell an existing asset, say stocks, in bad market have a greatly increased chance of running out of money, since they are pulling the funds from a shrinking pool of assets and the stocks that are sold do not have the chance to rebound.
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