Reverse Mortgage Loan - A Quick Review

A banker old friend of mine from India sent me this note (Thanks Anjan!) (note given at the bottom). It is an interesting financial product, it provides you with the way to take the returns from the main asset in your life and go enjoy. The concept is simple, you have got a flat/house which you have paid off and are living in it. So what do you do to unlock the value? You re-mortgage it to a bank, get loads of cash for it, and in return, the bank takes ownership of the house/flat. When you die, the bank asks your heirs to either purchase it back or sells it off.

I agree that old Indian people do not enjoy their lives. Look at the poor widow's, they aren't even supposed to eat spicy food!, and believe you me, this feeling is still out there in major waves.  So getting some good ready cash in retirement and using it for fun purposes appeals to me. Far too often, old people are taken for granted and are used as cheap baby sitters or thought about as burdens.

While this sounds like a great thing, some aspects from the British and American perspectives should be checked as well. The house is one of the most common assets which are called as inter-generational assets. It is this passing down of the asset which provides one of the key links in the establishment of the family social unit.

If there is no asset link and the parents move the asset out of the hands of their children, then the link breaks. More importantly, one has to remember that if the link breaks, then the responsibility for their life also remains with the old couple. And there are loads of downsides to this. For example, you would see that the couple manage to take their house and re-mortgage it. Then spend the money in going on cruises. Now they have spent the money, and the children are alienated from them (a sadly common scenario).

Then they need nursing care, and what happens? They are either dumped into a council old age home if they are lucky or they go into hospital for long term care. The first is desperately lonely and the second means that your life is shortened, hospital beds are not meant for long term palliative care.

Remember that India does NOT have a welfare net to take care of the old people nor is there good quality public health care with long term hospital care at a cheap price. My father's open heart surgery cost about 1 million rupees in a B class city. Pretty much on the middle to higher scale, it would have cost much more in the metropolitan areas. A typical house would cost say 1-2 million. Now just imagine, just one operation would take up most of the asset price. Then what?

Finally, take a look at what happened recently. Given the fact that there is such a high level of inheritance tax, there was almost a huge political upset when the opposition conservatives promised to chop the inheritance tax. People DO want to pass on their assets to their children. But when the taxman takes 40-50% of the asset, then you are stiffed and the essential pact between the family, generations, society and political system is weakened badly

So I would be very hesitant in pushing this kind of mortgages with gay abandon, one has to remember very carefully what this means.

MUMBAI: Traditionally in India retirement from active service is usually considered to be the end of active life, and sooner or later a retiree becomes entirely dependent on his or her children. A promise in the current year's budget by Finance Minister P Chidambaram of introducing reverse mortgage products is now fast liberating the senior citizens from that conservative parental mindset, putting him at a par with his European or American counterparts.

Reverse Mortgage Loan (RML) is essentially for the benefit of senior citizens, above the age of 60 years, against the security of their self-acquired, self-occupied houses. The loan is usually paid off by the legal heir of the borrower or is recovered by the sale of the house.

According to trends being seen by a few leading banks which have already introduced RML product, they are receiving an overwhelming response from senior citizens.

"The old, who are otherwise deprived or enjoying a tour or making a purchase due to non-supportive children or any other commitment, can now avail of a loan, and that too, without bothering about repayments in their lifetime," said Sangeet Shukla, chief general manager of the State Bank of India (SBI), while talking to this website's newspaper.

On the encouragement of the National Housing Bank (NHB), several commercial banks like Punjab National Bank and SBI have already introduced RML product. Looking at the expected demand, not only private banks like Axis Bank and ICICI even co-operative sector banks like Kerala State Co-operative Bank are likely to announce a RML product very shortly.

"A RML need not be repaid by the borrowers during their lifetime. They will also continue to stay in their houses during their lifetime. Thereafter, an option is available to the legal heirs to repay the bank loan and redeem the property. If this option is not exercised, the bank will sell the property and liquidates the loan and surplus, if any, will be passed on to the legal heirs," Shukla explained.

The interest rate on the RML currently varies from bank to bank, however, they are usually available at a rate comparable to the normal housing loan rates of that bank. For instance SBI's RML carries a fixed interest rate of

10.75 percent.

Speaking to this website's newspaper, Imtiaz Ahmed, AVP mortgages of Axis Bank said that there is a good demand expected for RML as senior citizens have hardly any other options left to explore a particular activity, which may need hard capital.

"Unlike in the Western countries when a retiree actually begins his second inning by planning long tours, a new project a profitable community activities etc, his Indian counterpart usually manages with a little interest or pension, which he may be entitled to and can hardly think of enjoying any liberties. We are also encouraging more and more senior citizens to avail a RML which will surely envisage fulfilling their cherished dream in their spare time," Gita Srinivasan, working for a senior citizen welfare association, said.