We are a country that offers no social security to most senior citizens (even after a lifetime of paying taxes), no long-term Medicare plans and increasingly, not even medical insurance for people over 55. Senior citizens also have few tax breaks on legitimate and ever-growing medical expenses. Simultaneously, the demographic profile of our middle class is changing and there are already plenty of 60-plus parents living alone in India, determined to be independent while their children live abroad or elsewhere. There is an even bigger population that will have no joint family system to support them as they grow older.
Almost all of them have one thing in common—a big chunk of their saving is invested in a home, usually financed by mortgage and unburdened by our inheritance laws. This segment pays its taxes and has comfortable lifestyles that cost a pretty penny, and suffer from a sense of panic about post-retirement expenses when income fluctuates with interest rates and medical expenses escalate continuously and are unpredictable.
In this situation, a ‘reverse mortgage’ (RM) product to provide old age security to persons who are ‘house-rich and cash poor’ is an unfulfilled need with a big market potential. It is the opposite of a regular loan in the sense that it allows individuals to get liquid funds every month against the value of their homes, while continuing to live in them till the end.
Here, lenders are primarily concerned with the value of property and not individual cash flow, income, medical fitness or age of the borrower. In fact, unlike insurance companies, lenders find it more attractive to lend to older persons. The borrower is expected to ensure that the homes are properly maintained, insured and all taxes are fully paid. Reverse mortgage is also attractive from the government’s perspective, if viewed as a social security alternative. It provides old age security out of a person’s own savings and without the government spending a penny out of the exchequer.
It is wonderful news that the National Housing Bank (NHB) is getting ready to launch RM with Reserve Bank of India’s approval. Several others, especially trustee companies and mortgage companies, are already exploring market opportunities very seriously. However, RM’s success will depend on its structure and confidence-building ability. The NHB talks of a Rs 5,000 crore market and plans a 15-year launch product, but uncertainty over one’s longevity will only deter people from jeopardising the security of their homes if the income stream could dry up when it is needed most, even if they are allowed to continue living in the house. At the same time, mandatory reinsurance (as proposed by the NHB) to protect lenders and borrowers from undue risks, and the non-recourse nature of RMs, are attractive features. However, success will depend on the government recognising RMs as part of its own welfare obligation and ensuring they are not taxed as income in the hands of individuals.
Regulations on RM must be structured with adequate empathy for those who opt for the product, keeping our systems in mind
In India, initial seekers of RM are likely to be individuals who have no family support or prefer to live independently rather than worry about inheritance laws or leaving assets for their heirs. The government must ensure that only the most credible institutions are allowed to offer RM products; that they keep interest (which tends to be higher for RM than conventional loans) rates and service charges reasonable, with no hidden acceleration clauses that would make the entire loan due immediately. In the US, the government launched the first RM product in 1991 through a government undertaking to build confidence in the product.
In India, it would be advisable to ensure that regulations are structured to prevent any harassment of senior citizens through unreasonable property maintenance conditions, stoppage of monthly payments or the threat of eviction from their homes. The product must be developed with adequate empathy and a realisation that the very age of these borrowers precludes them from fighting long battles in consumer courts. This is possible by getting lenders to justify any coercive action to the regulator before initiating it. In this sense, although RM products are a growing market in the developed world, our regulators must keep our systems in mind and be selective about who can launch RMs in India.