As a person moves towards the twilight years of life, one of the greatest concerns is keeping up with the financial needs of the life after retirement. Existing data shows that in India, only 4% of the persons over 60 years of age get a regular pension from their previous employers. Of course, most of the state governments provide pension schemes for the elderly. But the amount of such pension is not sufficient to provide for the overall financial requirements.
As a measure to supplement the existing source of income, the Reverse Mortgage was introduced in the Union Budget 2007-08 as a special tool for the senior citizens. It is meant to provide a steady stream of income to citizens in their twilight years. Also, with the present state of social security in India, it is imperative that a person makes sufficient provisions for the retired life.
Reverse Mortgage – How it Works:
In an ordinary mortgage, a lump sum is provided at the beginning of the tenure, which is to be paid back over the tenure as monthly installments or EMIs as they are called. The EMI has both a principal and an interest component. The property is kept as collateral with the bank. As the name indicates, Reverse Mortgage works in a reverse manner, that is, a regular installment is paid to the owner over the loan period. The bank recovers its amount with interest after the loan period is over, or after the borrowers vacate the house willingly or after the death of the borrower, whichever of the above is LATER.
Any citizen over 60 years of age is eligible, provided the property is self-owned, residential and free of encumbrances. The property should be the primary residence of the borrower(s). Married couples can apply as joint borrowers, if at least one of them is 60 years or above in age.
The loan amount, which will be determined as a proportion of the assessed value of the property, will depend on
- market value of the property,
- age of the borrower(s) and
- prevalent rate of interest.
The loan amount can be given as
- a periodical payment (monthly, quarterly or yearly), or
- as a lump sum, or
- as a line of credit.
Thus, we see that the reverse mortgage can be a powerful tool in supplementing the current source of income for the senior citizens, and provides them with flexible options for availing and repayment of the loan.
Reverse Mortgage: Future In India:
Having said that, Reverse Mortgage has not yet met with success in India. Mostly, reverse mortgage is popular in western countries. The reasons for this are social, rather than financial. In the Indian society, the residential house is also invested with a lot of emotions and sentiments. It is more than a mere house; it is a HOME! For an overwhelming majority of Indians, a self-owned house is the culmination of a life-long dream, hard-work and investments. In fact, most of the times it is the ONLY major investment that people make. As per our societal norms, very often children chose to stay with the parents, even if they are independent and employed. The residential house is bequeathed to the children as part of will or the final settlement. As such, the senior citizens become almost duty-bound to retain the ownership of the house. All these facts combine together to weaken the case for reverse mortgage in India.
Yet, a beginning seems to have been made. As of yet, most of the customers who are opting for reverse mortgage in India belong to the upper-middle class, who have a self-owned house, and their children are employed and settled elsewhere. With the passage of time, we are likely to see more people going for the option of the reverse mortgage.