Why are reverse mortgages important instruments in an asset-rich ageing India?

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In about 30 years, by 2050, at least 20 percent of India’s population will be over the age of 60.

A large percentage of this population, 69 percent in urban India, and 95 percent in rural India own homes. Even more significantly, these homes were bought for living in and only a small percentage was for investment. Today, as this asset-rich generation ages, the legacy is not something that the next generation is falling over itself to inherit.

This asset-rich, ageing generation needs to be able to convert this asset they invested in, to cash for their senior years. Reverse mortgage seems to be a good solution. Consider this: In the state with the largest greying population — Kerala — a doctor above the age of 65 reverse mortgaged his house to a public sector bank. He took loan of about Rs 10 lakh as a consolidated amount for 10 years, which could be raised up to 15 years. The option of sustained monthly income was kept in reserve. The house itself was worth much more but he took this money for an immediate need, without dipping into his savings. Without any interest in the house from his heirs, the asset was his for his lifetime. So why not convert this into cash!

As India ages rapidly, a new generation of asset-rich, and potentially cash-poor generation, will soon be looking to encash that acquired real estate asset into an annuity till death. Reverse mortgage has been an extremely successful financial product globally but is yet to make its mark in India.

So what is a reverse mortgage? It is a real estate, say a house you live in currently, which is fully paid up, which can be pledged to the bank or lender in lieu of a regular sum of money. The borrower or spouse does not have to pay back the loan during their lifetime. After the death of both spouses, the home reverts to the bank, which can sell the house and recover its dues — principal plus interest. The remaining amount, if any, will be handed over to their heirs, who also have the option to pay back the utilised amount and buy back the property, if they so wish.

Anybody who is above the age of 60 is eligible to apply for the loan. The spouse’s age should not be less than 55-58 years, depending on the lender chosen. The loan of Rs 3 lakh to Rs 1 crore can be given for a period of 10-15 years. There is a processing fee and stamp duty, among other charges, with an interest of about 12.5 percent (depending on the provider).

If the amount generated at the time of sale is less than the lent amount, the lender has to manage the losses as it is a non-recourse loan. Also, while there are pre-conditions that the borrower must maintain the upkeep of the house, as they age, this may not happen, and the value of the property may reduce. While this is not a consideration for stand-alone houses, where the land value compensates the depreciation in the built asset, in apartments this may be a consideration. As a result, reverse mortgages have been de-risked by lenders to such an extent that they become less attractive for homeowners.

Interest on reverse mortgage loans accrue constantly. But they are deferred till the homeowners die, or sell out the property. Here lies the problem that has made this product not so attractive to the banking sector. While the returns come only after the loanees’ demise, the taxes on the loan accrue to the bank annually. This means that the lender is paying out currently, but receiving at a nebulous future. The lenders would much rather lend to young borrowers who pay interests monthly.

So why is it important to address this issue now?

As India moves from 35-50 percent urbanisation in about 10 years, the concept of nuclear homes is going to be even stronger. While this gives privacy to a lot of urban Indians, it also means that once out of the formal workforce, this ageing generation has to rely on past savings to continue till the end of their lives. In rural settings there are extended families in the vicinity or even land which provides basic produce. Urban Indians only have past savings to rely upon.

Another feature of the nuclear urban family is that children move out, and pursue job opportunities in other cities within the country, and beyond. With no real affiliation to the home or city that their parents lived in, the house ceases to have emotional value, and becomes a pure monetisable asset. The thus-far independent parent population too is often reluctant to depend upon children to look after them in their old age. The reverse mortgage allows them to encash the equity of the homes they bought in their youth, during old age.

There is another aspect to reverse mortgages which should be pushed by developers who have been making retirement homes in large numbers across India. A retiree buys the house and moves in after the age of 60. In many cases the facilities are managed commonly. While rich retirees are able to pay their dues regularly from past savings, as they age, medical emergencies can drain the saved resources. Then the regular payments are the responsibility of the next of kin. In cases where the next of kin are not interested to be saddled with this payment, or where they themselves age before the parents die, converting assets into liquid cash would ensure that the payments are made on time.

Eventually, I see a tripartite agreement evolving, where the builder sells to a senior citizen, who pays for the property, mostly upfront, and not on borrowed money. When the senior resident finds it difficult to pay regular dues, the property can be reverse mortgaged during the life tenure of the retiree, and then reverts back to the builder, for whom it is a valuable asset to repurpose later, and sell to the next buyer. For the resident, it means that the asset not only provides a shelter, but is also a means to pay regular dues during their lifetime. For heirs, inheriting the retirement home is a hassle they can do well without, in most cases.

Whatever the reason, reverse mortgages are a valuable instrument in an ageing society. India cannot push this instrument under the carpet, and hope the problem goes away. It will only become popular if the small creases in the instrument are ironed out with policy tweaks.

E Jayashree Kurup is Director, Wordmeister Real Estate & Cities. Views are personal, and do not represent the stand of this publication.