Reverse mortgage can be considered as an innovative financial product offering a lifeline for senior citizens (60+). As the name indicates, a reverse mortgage is a mortgage ‘in reverse’. Under a normal mortgage, the home buyer i.e. the borrower obtains a loan to acquire a property or to finance his home. Under a reverse mortgage, the owner of a house property can mortgage his property to a lender to raise money which can be a regular source of income during his balance lifetime. This innovative scheme aims at enabling senior citizens to fetch value out of their house property without a need for selling it.
How RML works?
The reverse mortgage loan amount depends upon the value of the property under consideration. This value is determined by the factors such as supply/ demand, interest rates, market conditions, age of the property etc. all having their collective influence. In addition to this the factors like age of the borrower, existing loan, spouse age etc are also considered.
Once the mortgage is approved, the bank disburses a predetermined loan amount arrived at using the above factors. The amount is paid as a lump sum or normally at regular intervals to the borrower. From borrower’s point of view this is a consistent and reliable income source, supplementing his financial needs.
As the time progresses, with the receipt of the loan proceeds the borrower’s equity in the property gradually decreases, maintaining a financial balance in the process.
Financial Liberty:
A reverse mortgage can give financial stability to senior citizens so that they do not have to depend on their children or other family members for financial support. This can take care of their healthcare, leisure activities, savings/ investments or their daily expenses and most importantly it can offer them a mental peace.
Limitations:
This concept is very popular in most of the developed countries with the extended support from the respective governments, laws in place and the strong regulatory framework. RML has started gaining awareness in India in past 10 years. But still its popularity is limited. It is believed to have failed to take off mainly due to : emotional attachment to a property from borrower’s side, various property related and other risks faced by the lenders and lack of social security angle and absence of strong regulations from the government. Borrower eventually ends up losing control of his house as the asset is utilised as security during his lifetime. In India, traditionally property is passed on from one generation to another. Hence, people are reluctant to use their property to meet their daily expenses. But with some broader angle on financial security, borrowers should be able to find value in this product. Lenders can apply various risk mitigation technics to protect themselves and with firm regulations in place and support from the government this product can gain momentum.
Finally, for a senior citizen having his own house but not having enough savings or investments and looking for regular income, reverse mortgage could be an option worth considering.
References:
https://www.thinkindiaquarterly.org/index.php/think-india/article/download/17870/12872
https://www.researchgate.net/profile/Dr-Anurag-Pahuja/publication/307375120_Reverse_Mortgage_An_Empirical_Study_in_Indian_Perspective/links/57c51e7c08aecd4514156220/Reverse-Mortgage-An-Empirical-Study-in-Indian-Perspective.pdf?origin=publication_detail