Reverse Mortgage–It doesn’t work in India

Reverse Mortgage is not a very oft heard and used term in India, despite the fact that there are millions of old age people in the country. Just taking a peek at the Age Transition graph for India [Source PDF], it is clear that the population of old age group folks are going to increase many-fold from this year onwards. It is obvious that the entire old population is not going to be financially stable with the rising inflation & increasing health care costs and they would not have much means to earning in old age since the working age population will be growing as well.

The concept of Reverse Mortgage is very simple as shown below, where any senior citizen who owns a house can go to a bank. The person can avail the reverse mortgage loan from the bank by mortgaging the house to the bank. This loan ensures that the senior citizens can get a decent monthly income(based on the valuation of the house) till the senior citizen is alive and can stay in the house as well. It helps the “house-rich-but-cash-poor” people.

The whole idea is to ensure a financial monthly cash flow to allow senior citizens to live freely and independently. Upon the death of the person, the bank may return the house to legal heirs if the loan is paid back or else the house is sold and loan recovered, with the remaining amount paid back to legal heirs. An excellent post on what is reverse mortgage is here.

The concept is simple and on the paper it sounds to be a super-hit with the ever increasing population above 65 years in India, especially with the family support system breaking very fast. In my apartment complex itself, I have seen hundreds of old age people, who are staying alone with their kids settled out of country. But to the surprise of financial institutions, the scheme has seen a very damp response in India.

Let us ponder over why this superb scheme doesn’t seem to attract enough investors.

• The scheme targets the senior citizens, but who are currently the senior citizens? The folks who are above 60-65 years. These are the people who were born when India attained independence. These are the people who saw liberalization, when they were already past their youth. These are the people who had very less opportunities for earning money and with too many social taboos and rituals. These people never knew consumerism and did not know how to spend the money. They just know how to save money and make assets and that is why these people built houses sometimes more than one. The whole thinking of the current senior citizens is “What will I do with the extra monthly income, for which I need to sell my house?”, rather when I die, I will give these houses as assets to my children and my grandchildren.The scheme would make sense for people who are currently in their 40s-50s, and hence the banks should actually make these schemes available to people above 40s (definitely lot of varieties/conditions can be included for different age-brackets)
• The scheme is not marketed very well and very few people actually understands it. I feel that most financial institutions feel that dealing with senior citizen is very risky. The risk arises from multiple factors especially from the fact that they have not much alternate source of income (and exactly the reason they enter into reverse mortgage in the first place) and hence these people can not be pulled into other schemes of the bank. It is also important to note that the value of a house over a period of time will be sustainable when it is maintained properly, but with senior citizens having health issues and not much available cash, it would be difficult to do so. This may cause a deterioration of the house value over long periods of time. Also it is very difficult for marketing/sales people to deal with their idiosyncrasies and the paranoia. The fact that a banking institution while giving loan typically prefers a longer duration (in normal loans they have pre-payment penalty for early loan closure), but for senior citizen the risk of the scheme getting closed early is high and hence their is less chance to earn profits. Then their may be multiple issues of dealing with legal heirs in case of a death. So, all in all, senior citizens are not worth looking forward for in terms of making a customer base and hence banks have very little in marketing these products. In fact, I see very few schemes targeting the senior citizens and even if their are, they are not marketed enough.
• The legal framework is not very strong in India and which makes this scheme much more risky. There are moral issues related to these schemes, for example, if an old widowed lady is not able to maintain the house causing deterioration of the value of the house, would a bank take a legal recourse for ensuring say the roof be made leak-proof or to paint the entire house etc. It is very difficult to handle legal issues related to old people where the legal heirs are all settled outside the country especially when either the legal heirs are not interested or when the residual amount to be gained by them is miniscule. Also there may be issues of corruption when a broker/legal heir/bank employee may seek money outside the agreement (under-hand dealing) and sell the house at a very low-price, thus making a loss for the bank but a personal monetary gain. There could be issues where an elderly person discovers a major health hazard (not everything is covered by medical insurance) and which may require them to sell the house for treatment (or may be to move to a smaller house and use some money for treatment). In such a case, both the bank and the borrower may set to loose the benefit. Then their are multiple legal issues with priority of liens (
  It is a legal claim by one person on the property of another as security for payment of a debt.), in terms of taxes on the sale of the house and to prove the legal heir claims. The laws are not clear when a person or household declares bankruptcy, the issues of  senior citizens mortgaging the ‘other’ house and also putting it on rent (so essentially gaining money through rent as well as selling the part equity till they are alive).
• The upfront charges are typically high and these loans are rising debt loans. A typical loan, when repaid through EMI is a decreasing debt loans. So if you carefully understand how EMI is calculated, you would notice that some part of EMI goes towards lowering the principal as well, but with reverse-mortgage, the interest paid out get added to the principal and hence the debt keeps rising. The psychological barrier to this scheme is the loss of house equity as time progresses. Also since the ownership still remains with the borrower, the wealth tax, insurance, water charges etc have to be borne by the owner itself thus lowering the cash flow.

If I consider all the above scenarios, I would advice that this scheme is helpful only for those who do not have any legal heirs to pass-on the assets or to those who are desperate for some cash-flow (may be because their kids are no longer looking after them). This should not be considered as a means to fill the retirement goal corpus. Also it will take some time for the schemes to become more customer friendly.