O P Mathur, a retired professional, exhausted all his financial resources to get his only son a professional degree in Germany. While his son is well settled and has no plans to return to India, the biggest challenge facing Mathur today is the lack of a regular income. His only asset is the house he lives in, worth over Rs 2 crore.
Mathur’s case is not unique. In the absence of a pension or any other social security, many senior citizens across the country are left to fend for themselves without any financial support. In 2007, the reverse mortgage scheme was introduced with the aim of providing a source of income to cash-strapped senior citizens who had a house of their own.
What exactly is reverse mortgage?
As the name suggests, it is the opposite of a standard mortgage, used to buy a house, for instance. Under this scheme, senior citizens are required to mortgage their home with a bank. The bank determines the value of the house and agrees to provide a reverse mortgage loan. It is usually up to 60-80 percent of the appraised value, depending on the bank’s policy as well as the property’s resale value.
Also read: Reverse mortgage: A golden walking stick for senior citizen
Per the scheme, instead of issuing the full loan amount the bank provides the amount to the borrower in monthly instalments. The bank makes payments to the borrower/borrowers (in case of a living spouse) against the mortgage of the residential property. The borrower is not expected to service the loan in his lifetime.
Upon the death of both the borrower and the spouse, their legal heirs have the option of buying back the property at the bank-determined value, else the bank will take possession and sell the property in an auction.
There are several challenges associated with this scheme and that’s one of the reasons why it’s not popular in India. The primary reason is the psychological barrier, as the borrower ends up losing control of his house and the asset is utilised as collateral while the owner is still alive.
Also read: Why are reverse mortgages important instruments in an asset-rich ageing India?
Another potential downside is the borrower outliving the period of the reverse mortgage payout. It should be noted here that reverse mortgage loans are generally more expensive than conventional loans and require additional premiums and fees.
And it involves lengthy documentation. For most seniors, the process is tedious, complicated, and difficult to understand. The monthly payouts are fixed and there is no way to increase the amount in case of an emergency.
Also, upon your death your heirs will not be able to inherit the property if the reverse mortgage has not been closed. Most children consider it a liability and discourage their parents from going for it.
Take the case of Ashok Manchanda, a retired accountant with a corporate house. The apartment he resides in is worth over a crore. He plans to take out a reverse mortgage against the flat and expects a minimum Rs 50,000 per month from the bank. His biggest challenge is the lack of information about the scheme and people who have availed of it, and their experience.
“I know only one person who has availed of this, and according to him the bank has made it clear that the property needs to be less than 20 years old. But how is this possible? Usually a person buys a flat in his mid-thirties, as that is when he is able to save enough money for a down payment and have enough salary to service the home loan EMI. So, by the time he is 60, the property will be over 20 years old.
Also read: How reverse mortgage helps senior citizens increase their monthly income
Mohit Shukla, a banker, is of the opinion that reverse mortgages are like any other, where the bank has to ensure the returns against the collateral. The demand for the reverse mortgage scheme is usually from housing units that are in a dilapidated state.
“We can’t approve a mortgage on the notional value of the property. Reverse mortgage is more often than not high-risk lending, hence banks have not promoted it like other conventional forms of lending,” says Shukla.
The larger issue is whether a bank can deny a senior citizen his right to reverse mortgage. Venket Rao, a legal advisor, points out that the scheme has been floated more like a social welfare programme than as priority lending. Since it is a high risk mortgage, banks have not been very aggressive in promoting the scheme.
“This is eventually a loan and hence the bank reserves the right to deny it, based on their evaluation criteria. The bank has a right to approve or reject the mortgage post the valuation of the collateral. It is high risk lending for the bank and very high rate of interest for senior citizens. Thus, it fails on both counts,” he adds.
