Reverse Mortgage Scheme has been in presence for 8-9 years. In western countries this product runs with huge success and is a preferred option for retirees. But in India the same reverse mortgage product is yet to take off. Not many are opting for it even though the goodies were rolled out in the second phase. There are reasons for it but first we need to understand the product itself.
What is Reverse Mortgage?
In simple words, under a reverse mortgage scheme any individual can mortgage his/her residential house to any financial institution which in turn pays a fixed instalment at a defined rate of interest. The first phase of this scheme was Reverse Mortgage Loans where payouts are generally for 5-20 years. On completion of the term or early death the borrower or the legal heir can claim the house by repaying the loan. Since the fixed term payout was not a very lucrative option and there were too many restrictions it did not go well with the retirees. Then few institutions tied up with life insurance companies and came out with a lifetime annuity in this scheme for the amount of loan availed. Even then the acceptance was slow since annuity was taxable. To make it more appealing, the annuity under reverse mortgage was later made tax free. So, today a borrower can receive a lifetime annuity which is even payable to the spouse on the death of the first annuitant.
Why No Acceptance?
In India investing in real estate is a highly emotional decision. When a family lives in a house for 20-25 years then it’s difficult to see the ownership going out of hands to any financial institution. The decision is more difficult when one has built the asset through loan. Thus, the house one buys in his lifetime is actually perceived to be an asset for next generation. Considering that here still children take care of their parents in their old age no parents wish to take on any liability on the house and pass it on to the children. All these reasons attribute to the slow acceptance of Reverse Mortgage Scheme in India.
If we consider the tax-free lifetime annuity, Reverse Mortgage is a good scheme to rely upon when the financial constraint is too much and there is no recourse. With this option, the risk of living longer is also taken care of and with better payouts. The house ownership can always be claimed back by paying the loan availed. If institution sells the house then cash surplus, if any, is paid back to legal heirs. In a nutshell, the scheme in its present form does provide a good option for retirees to plan their post-retirement income.
(The writer is a SEBI-registered investment advisor)