Reverse mortgage has proven to be a very effective tool to supplement
one's income in old age, particularly in Western countries like the
United States. However, despite being introduced 7-8 years back in
India, it has failed to take off the way industry experts had hoped.
But before finding out the reasons, we need to take a look at what reverse mortgage is all about.
But before finding out the reasons, we need to take a look at what reverse mortgage is all about.
Reverse mortgage, in fact, is a special type of loan against a home
that allows the borrower to convert a portion of the equity in the
property into cash. In simple words, reverse mortgage is a scheme where
any individual (senior citizen) who has a self-occupied house and is
looking for regular income can mortgage it to a financial institution.
In return, the institution pays the person a fixed periodic (monthly,
quarterly, annual) installment or a lump-sum amount at a defined rate of
interest.
"The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be," says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
With a traditional second mortgage, or a home equity line of credit, one must show sufficient income versus debt ratio to qualify for such a loan, and needs to make monthly payments towards the mortgage. However, reverse mortgage pays the borrower, and is available regardless of current income or assets.
"The amount that can be borrowed depends on the borrower's age, the current interest rate, other loan fees, and the appraised value of the property. One does not have to make payments, because the loan is not due for paying off as long as the house is one's principal residence. However, like all homeowners, the borrower is still required to pay applicable real estate taxes and other conventional payments like utilities," says a Jones Lang LaSalle (JLL) India report.
Thus, as it is clear, unlike the other lines of credit, reverse mortgage doesn't require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. Also, "in reverse mortgage, the borrower doesn't have to pay principal or interest payments during the loan tenure (15-20 years). More importantly, the amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner," informs Chintan Patel, director-real estate practice, Ernst & Young.
However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.
Anuj Puri, chairman & country head, JLL India, says, "In the first place, it is a predominant tendency for Indians to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation, and would be liquidated only as a last resource. Also, the elderly tend to hold a place of importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years."
"The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be," says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
With a traditional second mortgage, or a home equity line of credit, one must show sufficient income versus debt ratio to qualify for such a loan, and needs to make monthly payments towards the mortgage. However, reverse mortgage pays the borrower, and is available regardless of current income or assets.
"The amount that can be borrowed depends on the borrower's age, the current interest rate, other loan fees, and the appraised value of the property. One does not have to make payments, because the loan is not due for paying off as long as the house is one's principal residence. However, like all homeowners, the borrower is still required to pay applicable real estate taxes and other conventional payments like utilities," says a Jones Lang LaSalle (JLL) India report.
Thus, as it is clear, unlike the other lines of credit, reverse mortgage doesn't require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. Also, "in reverse mortgage, the borrower doesn't have to pay principal or interest payments during the loan tenure (15-20 years). More importantly, the amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner," informs Chintan Patel, director-real estate practice, Ernst & Young.
However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.
Anuj Puri, chairman & country head, JLL India, says, "In the first place, it is a predominant tendency for Indians to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation, and would be liquidated only as a last resource. Also, the elderly tend to hold a place of importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years."
Echoing similar views, Patel says that property ownership in India is
considered as an inheritable subset, which is ideally handed over to the
legal heirs. Also, the owned property is considered for trade unless
there is a substantial benefit or imperative financial crisis of owner.
Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh - Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.
The structure of the product is also cited as the main reason for its unacceptability in India. In fact, when launched, it was a loan from a bank for a fixed term up to 5-20 years. There were also a few disadvantages in this product. Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan.
"This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter," says Jitendra Solanki
Source: Economictimes
Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh - Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.
The structure of the product is also cited as the main reason for its unacceptability in India. In fact, when launched, it was a loan from a bank for a fixed term up to 5-20 years. There were also a few disadvantages in this product. Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan.
"This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter," says Jitendra Solanki
Source: Economictimes
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