Should we promote
Reverse Mortgage in India?
[In this article, we are going to discuss in brief the evolution of reverse mortgage and the promotion of the product in Indian context. The objective is to bring out how the need for such products was felt in some of the matured markets. We will also find whether India is really ready for it and if so how do we promote it in the community. We would also like to touch upon the social fabric of the society and the future of this product in nascent stage of growth in India.]
Reverse Mortgage as a concept is well known to mortgage professionals in Indian retail financial services market. The product has been in existence in some of the western markets for more than three decades. In India, the product was introduced in financial budget presented in 2007-08 by then Finance Minister Shri. P. Chidambaram with a vision to bring smile to the elders of the society. In a country devoid of any social security, this product is well thought out for Senior Citizens enabling them to release the equity of their self-acquired and owned residential property.
The product “Reverse Mortgage” in simple terms is unlocking the value of a self-owned residential property with a major difference being that the individual availing this product can get lump sum funds or periodic payments or combination of both unlike the need to repay periodic installments when you avail a home loan or home equity loan. Thought behind this product is that a senior citizen can supplement his/her income and continue to stay in the property till his/her death or the death of the spouse. The loan amount availed gets settled by sale of the property by the financial institution and any amount received excess of the outstanding loan amount is given to the legal heirs. The customer can foreclose at any point of time during the loan tenor and release the mortgage.
In this human saga of survival on this earth, this product innovation can help elderly members of the society to live with dignity, respect and honor. The government’s world over are increasingly finding difficult to manage their scarce resources in social security programs. Adding to the pressure of the national budgets of developing & developed economies, the social fabric of the community is also being tested. Now the concept of joint families and supporting parents in their old age is giving way to nuclear families and old age homes. Increasingly, it is seen that elderly parents are living all alone fending for themselves emotionally and financially.
It may be essential to make some of the readers coming to this page of the blog to understand the concept with an example. Let us say, Mrs. & Mr. Kryo wants to purchase a new home or home on resale by availing housing loan from a bank or mortgage finance institution. Based on the property cost, their credit history and norms of the institution they would avail a loan for tenor of say 15-20 years probably at fixed or variable rate. In this scenario they would be paying monthly installment for the next 20 years or till they foreclose the loan. Typically we may also call it as forward mortgage.
If the same couple after foreclosure wishes to avail a loan against the market value of the property, the financial institution would probably extend Home Equity Loan based on the property value and credit history of the customer. The couple would be repaying the loan as per the periodic installment for the tenor availed.
Now, interestingly the same couple at the age of 60+ approaches for a loan with no income source can still avail a reverse mortgage wherein instead of repaying periodic installments, the mortgage finance institution would extend funds as a line of credit or lump sum payment or periodic annuity payment for a fixed tenor or for life time. This sounds good when you look at the life cycle of the property it undergoes in tandem with life cycle of the owner of the property complementing each other as a true companion.
Scenario in Developed Economies:
The product was formally institutionalized around 1960 in USA and it has been reasonably well accepted in UK, Canada and Australia only in the last two decades. In USA, the government’s federal housing administration’s backed project Home Equity Conversion Mortgage (HECM) is popular and the entire product is probably 1% of the total mortgage market.
It has taken almost two decades for this product to get reasonable response. The reasons are not very different in each of the markets. It all starts with consumer education and acceptance. The reasons largely noted are fear of not losing roof over head to emotional attachment to property and desire to leave behind the property for children. From the lending institutions perspective the product has number of risks associated and it needs government support in terms of funding considering the long term nature of the product.
The product has been in existence only for the last five years. In terms of the product life cycle it is still in infancy stage in India.
[ It is quite appreciable that within five years the National Housing Bank (NHB) has played a pivotal role in shaping the product from various legal and taxation perspective to get it presented in the parliament. The effort of NHB needs accolades as within these five years the basic version of the product was introduced for tenor of 20 years and now it has promoted Reverse Mortgage loan enabled Annuity(RMLeA) in joint association with Star Union Daichi Life Insurance Company and banks i.e, Union Bank & Central Bank. Since 2008, NHB has conducted more than 55 seminars educating and promoting this product across the country amongst the target group and also counseling centers are operational in joint association with Helpage India in multiple locations. ]
The last count indicated that nearly 25 banks have been promoting this product in India. The Press Trust of India carried news on May 21, 2010 stating that nearly 7000 RMLeA amounting to Rs.1400 Cr were sanctioned by various prime lending institutions in India. The Indian Express newspaper dated Nov 26, 2011 carried an article stating that only handful of 150 customers have availed out of 80 million population of senior citizens in this country. The purpose to quote the above news is only to bring home a point that such products will take its own due course for acceptance and it is good to take small steps in the progress.
For a detailed understanding of the operational guidelines issued by NHB, one can click on the link given here http://nhb.org.in/RML/RML_Index.php
Opportunities & Challenges for Reverse Mortgage in Indian Market
The opportunities for Reverse Mortgage s is bound to grow in coming years with awareness and education by multiple institutions. Let us look at the population distribution and population projection as per Indian Census figures.
Table -1: PROJECTED POPULATION 2001-2016
1. You will observe that India is very young country with more than 45% of its population projected to be below 25 years even in 2016. At the same time the target segment for reverse mortgage i.e, 60+ is gradually growing from 6.567% in 2001 to 8.26% in 2016.
It is an opportunity even from risk perspective for every player including the government to learn and perfect this product as the growing population ages with grace.
2. For availing reverse mortgage the senior citizen should have primarily self-acquired residential property with no encumbrances. It would not be possible to avail on ancestral property as the ownership has to be passed on to the legal heirs.
Secondly, home ownership has registered steep growth only from early 2000. Please find the status of home ownership and condition of houses shown in the Table –II A & B given below. We have identified only two important factors i.,e houses having concrete roof and households having bank accounts as parameter to filter the customer segment that possibly may avail Reverse Mortgage. It looks like that segment may not be more than 70 - 90 million as of today considering initial acceptance in urban pockets.
Even addressing 10% of this segment every year would mean a large pie of 7 to 9 million customers to be catered. If the reverse mortgage loan size is just Rs.20 lacs, we are talking in terms of trillions. A comparison with housing demand of 24.7 million units puts this figure at 28% to 37% of new homes. This segment will only increase.
3. It is important work on this product and perfect the mechanism as the generation that is flowing in this segment would rise with government expecting people to do their own retirement planning with life time pension even for government servants being out of question. I think it is perfect case for banks, HFCs, Insurance companies, PFRDA along with the government and NHB to create a road map for synergy.
4. There are two ways to look at the Life Expectancy Table –III shown below. It really indicates that it is a rising trend with better medical facilities. However, the medical facilities would come with a cost requiring more investment into medical care and also expenses for basic living which the population will face as they age with depleting resources.
On the other hand from the risk perspective this throws a challenge for the lenders as the portfolio may have adverse age group. The property would be available only after the death of the joint owning spouse which may end up having negative equity and there is no recourse to recovery other than the property.
There are three challenges in this product segment
1. Resources: While it is becoming increasingly difficult to raise long term resources for mortgage finance institutions for new home loans, one may wonder how they would address for the reverse mortgage product where the interest accrued as income may be realizable only after 10 to 15 years.
That actually brings to a question as how the accounting is being done and what are the tax implications for such mortgage finance or banking institutions on income shown in its books. One should also consider the regulatory norms for provisioning and capital allocation in this product segment.
2. Property: Considering the quality of present day construction it is possible that age of the property may be substantially reduced at the time of valuation reducing the customer’s eligibility. At the same time from the institutional perspective it is essential to do so to avoid market risk on the realizable property value.
Today, we really need to usher in the building construction codes in true sense so that an individual in old age is able to release sufficient equity in the property.
3. Customer: From the customer perspective it is essential to have extensive educational programs. However, the seminars should include the family members of Senior Citizens to set the fears to rest and be good influencers in this product segment. Taking a leaf from the adage “catch them young”, we probably need to address the segment while at 55+. We will definitely find more innovation in communication as we go ahead.
The community programs have to be sustained to penetrate 10% of the population in the target segment.
Further, from the income tax perspective there is an anomaly in the treatment of annuity received through an insurance company and if the same is received as lump sum amount or periodic payments from a lending institution. The same has been reproduced here.
1. All payments under reverse mortgage loan are exempt from income tax under Section 10(43) of the Income-tax Act, 1961. However, periodic annuity payments are subject to tax under Section 17, 56 and 80CCC of the Income Tax Act and taxable in the hands of the annuity recipients.
2. Section 10 of the Income tax Act, 1961 has been amended to provide that any amount received by an individual as a loan, either in lump-sum or in installment, in a transaction of reverse mortgage referred to in clause (xvi) of Section 47 of the Income-tax act shall not be included in total income.
We believe that there is a big market waiting to be tapped and the players would have done their homework. As consultants in the mortgage financial sector, we look forward to be of assistance to institutions in promoting this product.
As industry professional, we feel further research from the perspective of all the stakeholders can be done. We look forward to a benevolent institution to fund this research assignment or if some work is in progress, we would be more than glad to be associated with the project.
[ We look forward to your response and valuable comments. You can look forward to more articles on Reverse Mortgage on this blog in the days to come. ]