Reverse mortgage loan (RML) was introduced in India in 2007 with a lot of expectations for the asset-rich-but-cash-poor senior citizen. But eight years down the line, planners, RML counsellors and bankers unanimously say that there is very little demand for the product. “One of my clients’ children who lives overseas asked me about reverse mortgage. It was discussed as an option for this client because his children were familiar with the product in the West. In India, people don’t opt for it,” said Nisreen Mamaji, certified financial planner.
What’s on offer?
First let us understand who can opt for RML. Only a senior citizen (60 years or above) who owns a residential property can opt for this product. If a couple is opting for the loan jointly, one of them should be a senior citizen and the other at least 55 years old. While calculating the amount, the lender factors in your age, value of your property, current interest rates and the specific plan chosen. Also the residual life of the property should be at least 20 years.
The maximum monthly payment under RML is capped at Rs.50,000, and the maximum lump sum payment will be 50% of the total eligible amount of loan with a cap of Rs.15 lakh. Remember that you will have to continue paying all the taxes related to the house, insure it and maintain the property as your primary residence.
The valuation of your property will be done at periodic intervals by your lender. Currently, big nationalised banks and some private banks offer reverse mortgage loans. Interest rate on these loans is usually in the range of 2.75-3% above the base rate.
Like any other loan, reverse mortgage also attracts charges such as processing fee and prepayment penalty. Processing charges are in the range of 0.25%-0.50% of the loan amount with a minimum and maximum cap. The time taken for processing is almost equivalent to that of taking a home loan. According to a State Bank of India (SBI) official, necessary due diligence, scrutiny and verifications exercised by banks during the processing of regular home loans is also applicable for RML and hence, the time involved in the processing it is same as that for regular home loans, i.e. 10-16 days. The average ticket size under the RML scheme for SBI is Rs.28 lakh, said the SBI official.
There are two variants of RML available—regular RML and reverse mortgage loan-enabled annuity (RMLeA). If you opt for a regular RML, you will either get a lump sum amount or instalments, depending on the frequency you have opted for. In a way it is similar to loan-against-property, the difference being in RML you have no compulsion to pay back the money at the end of the tenure. The tenure of this loan is 20 years and at the end of the tenure, the lender will stop paying money. You don’t have to repay the loan amount during your lifetime or until you live in the house.
RMLeA is a reverse mortgage backed with annuities and hence it works like a pension product that pays for lifetime. If you opt for RMLeA, you will get the money from a life insurer as the lender gives the loan amount to an insurance company. The insurer then annuitises the corpus and gives you pension money for the rest of your life.
Why RMLeA is superior?
In a regular RML, lender will make a payout till the end of the tenure. For instance, say your property value is Rs.1 crore and loan-to-value (LTV) ratio is 90%. At an interest rate of 12.75%, monthly payout will be Rs.8,218 for 20 years. Say you survive this tenure, though you can still stay in the house, regular income from the lender will stop.
In RMLeA, however, the LTV is lower at 60-75% depending on the borrower’s age. Here the lender makes a one-time payment to an insurer. The insurer works out a monthly payment based on actuarial calculation that it will pay for life. Usually annuities are offered at an interest rate of 6% a year. The payout in RMLeA is much higher than RML. So, for a property worth Rs.1 crore, with an LTV of 60%, the lender will give the insurer Rs.60 lakh in lump sum. The insurer will calculate a monthly payout for life. And the payout is likely to be around Rs.25,000 per month.
Lack of interest
RML failed to take off due to three reasons: emotional attachment to a property, lack of understanding of the product and lack of awareness.
“We have seen a lukewarm response for reverse mortgage. In India, the tradition is to pass on the property to the next generation. Hence, people are not keen on using their property for their day-to-day needs,” said Jairam Sridharan, president–retail lending and payments, Axis Bank Ltd. Axis Bank offers both regular RML and RMLeA. He also mentioned that people find the product complicated unlike a plain vanilla home loan. Furthermore, people prefer other options to reverse mortgage.
Senior citizens who are asset-rich-but-cash-poor don’t opt for reverse mortgage. Instead, they prefer to sell their bigger house and relocate to a smaller one, and use the proceeds from sale of the older house for their day-to-day expenses.
However, bankers and financial planners say that RML may take-off in the next 10-15 years. But for now if you are looking for regular income and don’t have enough savings or investments, reverse mortgage could be an option.
What you could do is explore an informal reverse mortgage with your children as a half-way house, where you transfer ownership to their name and they can pay you an amount every month.