In the last couple of years, reverse mortgage (RM) has been touted aggressively as a product that will allow the elderly to unlock the value of their house. In fact, in the last two Union Budgets, the finance minister has made a special mention about it.
In the recent Union Budget 2008-09, the income earned from reverse mortgage was exempted from income tax.
Though a large number of banks and non-banking financial institutions (NBFCs) have launched it, the response has been rather lacklustre. The main reason, experts feel, is because the product has not been sold quite well by lenders. Besides, there is some ambiguity about property valuation, maintenance and repossession.
Said R V Verma, ED, National Housing Bank (NHB), "Valuation is an issue because the norms are not well-established." Nandan Shrivastava, general manager, retail, Bank of Baroda, said another reason for the product not taking off is most senior citizens are not comfortable with the basic idea of leveraging their property. "Though we have given targets to our branches, not many are approaching us," added Shrivastava.
Ravi Naval, senior advisor, Celent, a strategy consultancy for financial services said the low response has been due to high property valuations, which have provided home owners with the option of selling for higher one-time returns. Reverse mortgaging, on the other hand, provides piecemeal income and the procedure is ambiguous and tedious.
Even if one does opt for it, the numbers are also not very inspiring. And it's both because of high interest rates and lower valuations, in some cases. Sample this: For a Rs 10 lakh property (after a cushion of 30 per cent, that is, the bank reduces the value of the property from Rs 13 lakh to Rs 10 lakh), Union Bank of India makes a monthly payment of Rs 1,689 for 15 years at the rate of interest of 10 per cent a year.
Similarly, Dewan Housing, the first company to introduce this product, would give Rs 2,050 a month for a property of the same value for the same timeframe at 12 per cent interest a year. Even India's largest lender State Bank of India (SBI) offers Rs 225 per lakh at the rate of 10.75 per cent for 15 years, with the maximum payout being Rs 1 crore (Rs 22,500 a month).
However, SBI gives 90 per cent of the property value. And given that the onus is on the senior citizen to pay taxes and do regular maintenance of their houses, in many cases, costs may be on the higher side.
Most financial planners are of the opinion that one can approach RM, but only in dire need. "If one uses pure mathematics, the numbers are too small. A retired couple could earn more by simply renting out their existing flat and moving to a smaller one," said one financial planner.
However, often the elderly do not want to do so because they are used to living in a particular area and many may have friends and relatives living there.
As NHB's Verma put it, "The product will take the next three to five years to evolve. It's a learning curve for both lenders and borrowers."