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Home > India > Business > Budget 2008-09 > Columnists > Guest Column > Stanley Pinto in New Delhi

Reverse Mortgage: A failure in India?

March 03, 2008

The finance minister's budget proposals last year included the introduction of the reverse mortgage facility for senior citizens in India.

Recent reports seem to indicate that less than 150 people have taken advantage of the facility since its inception, and it is, therefore, likely to be considered a failure. This is unfortunate because the facility simply has not been adequately explained. It was also unattractively packaged.

The reverse mortgage facility allows senior citizens to unlock the value of their most valuable asset, their home, by mortgaging it and enjoying the use of the money in their lifetime while continuing to live in it until their deaths.

It is a well-entrenched idea in many developed countries in the West where its terms are such that only home-owners above a given age (typically 60-65 years) may apply.

The bank makes an evaluation of the current value of the home, decides the likely lifespan of the applicant home-owner (and his/her spouse), and, decides what percentage of the current value they are willing to loan them. The bank also fixes the interest rate it wishes to apply.

Typically, the loan amount seldom is lower than 60-70 per cent of the market value of the property. The applicants have the option of taking the loan principal in a single lump-sum amount or by a fixed monthly amount instead.

From time to time, the value of the property is re-visited by both parties. If the valuation has increased, the applicants are given the option of increasing the quantum of the loan, and should they do so, are given the incremental amount in lump-sum.

If they have opted for the monthly payment scheme, this amount is appropriately increased. The principal plus interest charges accrue at the bank while the applicants live on in the home for the lengths of their lives - or until they decide to sell the home, whichever comes earlier.

If they choose to sell it, they have to pay the bank all the accrued amounts. On the death of the second of the two spouses, the heirs to the property decide either to redeem the loan and keep the property, or sell the property and take the residual amount that may accrue from the sale after settling with the bank.

Should the sale proceeds be lower than the accrued principal plus interest amount, the bank takes the loss. (This could happen if the real estate market has not moved up in the manner the bank had estimated originally. However experience of the past indicates that the banks seldom lose, as they factor this likelihood in setting the percentage of the current value they loan the applicants.)

The Indian banking industry must not complicate the scheme as it has done. The industry's offer caps the available loan amount at Rs 50 lakh, instead of providing for an equitable percentage of the property's value, and limits the loan period to tenure of 15 years.

Which 60-year-old couple would wish to put themselves in a position to have to redeem the principal plus interest amount when they are 75 or more, at which age they are unlikely to have the stamina to sell out and move to a new home, which would inevitably be their only option? Inadequate clarity and inappropriate terms have led the reverse mortgage loan facility in India to have limited takers.

It is possible that most Indians will not sell the family home, and would prefer passing it on to the next generation, even if they have to live in relative penury during their waning years because of the small income. However, many Indian traditions and values have changed in the last 15 years. This is like many other things.

For example, we hated debt and dreaded living on borrowed funds. The Diners Club credit card was introduced in India in the 1960s. It never ever took off. But today's new generation has upturned that.

More credit cards are issued in India per month than in most countries in the world, and cards have changed the way life is lived. The increasing GNP and the surge of the manufacturing and service sectors owe much to the great surge in consumer purchasing, including of expensive aspirational goods and real estate.

The urge for a better life NOW is almost fundamental to the way the younger generation perceives its goals.

Another example has to do with the tradition that parents moved in with one or the other of their children when they grew old. That too is changing.

Work opportunities are moving young people away to new cities, even new countries, where their parents cannot or will not follow them. And even in the same cities, many "modern" parents prefer to live on their own.

Further, in many cases, the children do not want to inherit the parents' home. Should they do so, they sell it anyway because they have moved on to bigger and better things. There are also old folk without children, and old folk out of luck with their children. In both cases, they are short of the cash to even pay essential bills.

So while the reverse mortgage idea may not take off in India as it has in the West, where social and parent-child behaviour usually dictates that the old folk live off their very last penny before they die, there are sufficient demographic and psychographic data to indicate that in India there are takers in the millions who, for one reason or another, are likely candidates for the reverse mortgage idea.

In any event, the proposal should be given the opportunity to fail for the right reasons. And that means it should be packaged and marketed in a way that makes sense to the likely customer.

Budget 2008: Complete coverage

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