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.
Indian Context
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
PROJECTED POPULATION (,000)
|
Age
|
2001
|
2006
|
2011
|
2016
|
group
|
Persons
|
%
|
Persons
|
%
|
Persons
|
%
|
Persons
|
%
|
0-4
|
121395
|
11.8
|
115239
|
10.36
|
114878
|
9.63
|
114101
|
8.99
|
5-9
|
123311
|
11.99
|
119290
|
10.73
|
113486
|
9.52
|
113309
|
8.93
|
10-14
|
119876
|
11.65
|
122469
|
11.01
|
118577
|
9.94
|
112880
|
8.9
|
15-19
|
104038
|
10.11
|
119056
|
10.7
|
121727
|
10.21
|
117928
|
9.29
|
20-24
|
91034
|
8.85
|
103048
|
9.27
|
118038
|
9.9
|
120774
|
9.52
|
25-29
|
82941
|
8.06
|
89963
|
8.09
|
101956
|
8.55
|
116887
|
9.21
|
30-34
|
75838
|
7.37
|
81858
|
7.36
|
88905
|
7.46
|
100854
|
7.95
|
35-39
|
67971
|
6.61
|
74700
|
6.72
|
80759
|
6.77
|
87811
|
6.92
|
40-44
|
57518
|
5.59
|
66711
|
6
|
73464
|
6.16
|
79536
|
6.27
|
45-49
|
46911
|
4.56
|
56073
|
5.04
|
65211
|
5.47
|
71954
|
5.67
|
50-54
|
37159
|
3.61
|
45169
|
4.06
|
54195
|
4.54
|
63204
|
4.98
|
55-59
|
29933
|
2.91
|
35032
|
3.15
|
42837
|
3.59
|
51624
|
4.07
|
60-64
|
25691
|
2.5
|
27442
|
2.47
|
32405
|
2.72
|
39886
|
3.14
|
65-69
|
20514
|
1.99
|
22506
|
2.02
|
24397
|
2.05
|
29097
|
2.29
|
70-74
|
15996
|
1.56
|
16860
|
1.52
|
18943
|
1.59
|
20851
|
1.64
|
75-79
|
5308
|
0.52
|
12011
|
1.08
|
13092
|
1.1
|
15025
|
1.18
|
80+
|
3176
|
0.31
|
4761
|
0.43
|
9633
|
0.81
|
13238
|
1.04
|
Total
|
1028610
|
100
|
1112188
|
100
|
1192503
|
100
|
1268959
|
100
|
Source:
MOSPI - Office of Registrar General of India, Ministry of Home Affairs.
|
Interesting Fact:
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.
Table – II-A:
Houses,
Household Amenities and Assets
House list Item
|
Absolute number
|
Percentage
|
Total
|
Rural
|
Urban
|
Total
|
Rural
|
Urban
|
Total
households
|
246,692,667
|
167,826,730
|
78,865,937
|
100.0
|
100.0
|
100.0
|
Good
|
131,019,820
|
77,041,343
|
53,978,477
|
53.1
|
45.9
|
68.4
|
Livable
|
102,470,426
|
79,855,814
|
22,614,612
|
41.5
|
47.6
|
28.7
|
Dilapidated
|
13,202,421
|
10,929,573
|
2,272,848
|
5.4
|
6.5
|
2.9
|
Table – II-B:
Houses,
Household Amenities and Assets
|
Absolute number
|
Percentage
|
Households
by ownership status
|
Total
|
Rural
|
Urban
|
Total
|
Rural
|
Urban
|
Total
number of households
|
246,692,667
|
167,826,730
|
78,865,937
|
100.0
|
100.0
|
100.0
|
Owned
|
213,526,283
|
158,983,956
|
54,542,327
|
86.6
|
94.7
|
69.2
|
Rented
|
27,368,304
|
5,644,581
|
21,723,723
|
11.1
|
3.4
|
27.5
|
Others
|
5,798,080
|
3,198,193
|
2,599,887
|
2.4
|
1.9
|
3.3
|
Households
by Predominant material of roof
|
Concrete
|
71,659,299
|
30,746,938
|
40912361
|
29
|
18.3
|
51.9
|
Households
availing banking services
|
144,814,788
|
91,369,805
|
53,444,983
|
58.7
|
54.4
|
67.8
|
Source: Census
of India 2011 : Houses, Household Amenities and Assets
|
3. It is important work on this product
and perfect the mechanism as the generation that will flowing in to 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.
Table: III
Projected Values of Expectation of Life at Birth
Sr. No.
|
Indices (Expectation of Life at Birth)
|
2001-05
|
2006-10
|
2011-15
|
2016-20
|
2021-25
|
1.
|
Male
|
63.8
|
65.8
|
67.3
|
68.8
|
69.8
|
Female
|
66.1
|
68.1
|
69.6
|
71.1
|
72.3
|
2.
|
Projected
Population
|
1112.2
(2006)
|
1192.5
(2011)
|
1269.0
(2016)
|
1339.7
(2021)
|
1399.8
(2026)
|
- Census
India, Population Projection
Challenges
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(Source: NHB Website).
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 partner with any Institution or individual to conduct further research 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
|