Have your cake and eat it too...

Paid to mortgage: After 2 years RML is still waiting for momentum to take off

Reverse Mortgage Loan (RML) scheme launched with much fanfare in 2007 by the UPA Government has failed to take off in a big way due to variety of factors. Main reason was the lack of proper packaging and information dissemination to the target group. Considering RML was described as a saviour to the growing population of senior citizens — whose number is set to rise up to 140 million by 2016 in India — is the scheme still waiting for the much needed momentum to take off.

In simple terms, RML is a loan against your home that you do not have to re-pay as long as you live in that place. The concept is new in India and it allows senior citizens to unlock the value of their most valuable asset (their home) by mortgaging it. As they keep getting money from the bank for a pre-decided period, they can continue to live in the house until death. It helps them benefit from the long-term appreciation of their house too as a tangible asset by turning it into a source of much needed funds, post-retirement.

How it works 

In a reverse mortgage scheme, a bank offers a loan based on the value of the property and the borrower gets the money in monthly/yearly installments and upon borrower’s death, the bank takes ownership of the property.  Though the amount of loan depends on the value of the property, banks consider 40-90 per cent of the property value for giving monthly or lump-sum payments under RML. They have an upper limit (usually Rs 1 crore), which includes the interest accrued on reverse mortgage loan you take. While the upper limit of the loan amount is Rs 1 crore, the maximum amount that a borrower can get after accounting for interest rates is only Rs 40 lakh. 

Even after the loan is obtained, the property is valued by the bank at regular intervals of three to five years. If the valuation of your property increases, you are given the option of increasing the quantum of the loan. In a rare case if the value of property falls, the bank can revise the payments accordingly. If the borrower does not accept the revised terms, no further payments are made by the bank and interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan.

Selling with consent

During the mortgage period one can also sell the property but only with the Bank’s approval and money will come to you only after the bank deducts its accrued amounts. On the death of the second of the two spouses, the heirs to the property can decide to either redeem loan (for keeping the property) or sell the property and take the residual amount that may accrue. Should the sale proceeds be lower than the accrued principal plus interest, the bank takes the loss.

Here is an illustration to understand RML a tad easier: A 60-year-old retired individual opts for SBI’s reverse mortgage plan on his house which is valued at Rs 10 lakh. Then the maximum loan amount sanctioned by SBI will be Rs 9 lakh on a reverse mortgage tenure of 15 years with an indicated interest rate of 10.75 per cent a year, the applicant will get Rs 2,025 a month.  But if you were to borrow Rs 9 lakh for 15 years at the same rate of interest you would have to pay Rs 10,088 a month to the bank. Apparently, reverse mortgage earns much less. But then don’t forget that you and your spouse have the right to live in the house for lifetime. On the other hand, if you had sold the house you would have earned more but then would have to pay rent too. 

RML also come with certain terms and conditions and if they are not fulfilled, the bank may foreclose the loan. For example, if the borrower has not stayed in the property for a continuous period of one year or if he fails to pay property taxes or maintain and repair the residential property or fails to keep the home insured, the bank reserves the right to foreclose the loan.

Mixed response

Despite being attractive, the reverse mortgage scheme has failed to do as was expected. Around 23 banks and two housing finance companies have introduced the scheme in the last two years but except State Bank of India (SBI) most others have a varying degree of actual performance in RML. For some the performance is very poor.

Even before the scheme was formally launched by the Government, Dewan Housing Finance (DHFL) took the initiative early and was the first off the block in India with a scheme called ‘Saksham’ in August 2006 targeted at retired senior citizens above 60 years of age.  Then Punjab National Bank (PNB) launched the reverse mortgage loan called ‘PNB Baghban’ in April 2007 and in 15 months tenure till July 2008 it registered only 113 cases across India sanctioning loan up to Rs 49 crore. Union Bank of India’s RML called ‘Union Reverse Mortgage’ has also received a poor response. Union Bank Chairman and Managing Director M V Nair says “the response has not been good.  We have seen only a few takers for that plan.” 

Initially, the scheme failed to take off due to confusion over tax treatment especially whether mortgaging the home should be treated as an income and taxed or it should be treated as a loan. However, the government in the Union Budget 2008-09 made it very clear that the loan under reverse mortgage scheme will not be considered as transfer of capital, thus putting it out of purview of the income tax. Subsequent clarification should have ideally paved for the success of RML in a big way as it benefits both borrowers and lenders simultaneously. 

Yet, going by the latest data of National Housing Bank (NHB) with RML outstanding is just over Rs 573 crore from 2100 customers as on March 31, 2009 tells a different story altogether. 

Perhaps, the NHB data may have overlooked to include the stand-alone figures of the State Bank of India (SBI) which has sanctioned limits of Rs 683 crore spread over 3600 accounts in 2008-09. Even the combined figures of both NHB and SBI is still not inspiring enough given the large number of banks in the business.

However, NHB Chairman N.Sridhar differs and says: “Given the nature of the scheme, RML, has been a reasonable success and the concept has been universally welcomed within the country.”  So much so, the very threat of RML by some senior citizens has led to their children taking better care of them, pointed out Mr Sridhar based on feedbacks he received.  Clearly, to make RML popular banks and the government need to step up its efforts to bring about social awareness on the scheme on a sustained basis. Right now, most of the banks have not bothered to include RML in their products portfolio brochures, while their advertisements talk about all other products but not RML.  When queried, SBI Chief General Manager Nanda Kumaran says:  “The scheme was given wide publicity at the time launch by the Bank and is now a stabilised product.” 

Critics in the industry including CFA (chartered financial advisors) perceive that the basic drawback of RML is that the EMI is calculated on the Future Value (FV) of Present Loan amount even after safety margins. They also suggest that banks should view RML as an opportunity to deliver their social obligation and government should also add a part of subsidy by guaranteeing the loan.

From bankers view, marketing RML is a challenging task as it targets the vulnerable section of society and they will not be able to use the aggressive methods of marketing and advertising like they do in case of other loan products. Many customers want a big share of the loan amount at one go instead of monthly or quarterly pay-outs and banks generally do not encourage this trend as it would increase their lending risks.

Huge potential

A study paper titled ‘Assessment of Reverse Mortgage Products in Indian Market’ presented by two professors of Indian Institute of Technology-Delhi and Institute of Management Technology-Ghaziabad say RML is beneficial to the borrowers and lenders simultaneously. 

According to the study it is expected that the number of senior citizens would be 140 million by 2016 and 220 million by 2030. If 20 per cent of the eligible elderly population were to take the advantage of RML, the total number of loans would be of the order of 18 million in 2010, 28 million by 2016 and 44 million by 2030.  If the average eligible amount of one loan is taken to a conservative sum equal to Rs 10 lakh per borrower, the total RML market size will be in the range of Rs 20 to 25 trillion – which is about US$ 500 billion in dollar terms.  Lack of social security measures has created a need and desire for such products.