Reverse Mortgage Scheme has been in existence for the past 8 to 9 years. For countries in West, the product is quite a hit, and is definitely a preferred option for retirees. However, in India reverse mortgage products are not yet in the limelight while some are not even aware of an option such as this. People have not been interested in this scheme, despite goodies being rolled out in the second phase. There might be fair reasons why Indians do not like it but first let us understand what the scheme is really about and its basics.
Reverse Mortgage and How it Works
Any individual can mortgage his or her residential house or apartment to a financial institution under a reverse mortgage scheme which in turn pays a fixed installment at a defined rate of interest. The first phase of this scheme was called Reverse Mortgage Loans where the pay-outs are generally for up to 5 to 20 years. Once the term is over or early death of the borrower or the legal heir is able to claim the house by repayment of the loan. The fixed term payout was never a very lucrative option also considering there are too many restrictions, the retirees were not too pleased with the product. Finally a few institutions tied up with some life insurance companies and came out with a lifetime annuity within this scheme for the amount of loan availed. Despite of the advantage acceptance was slow as annuity is taxable. For appeasement, the annuity under reverse mortgage was made tax free, later. Hence, the final product remains where the borrower can receive a lifetime annuity that is even payable to the spouse on the death of the first annuitant.
Why People Do Not Like Reverse Mortgage Scheme in India
In India investing in real estate is a very dramatic decision. When a family lives in an apartment or house for 20 to 25 years then it’s a melodramatic situation to see the ownership going away to any financial institution. Also the decision gets more Bollywood when an individual has built the asset through loan. Hence, the house the individual buys in his lifetime is considered to be an asset for next generation. Considering that the children take care of their parents in their old age no parents wish would be a liability on the house and then pass it on to the children. These reasons may sound selfless too many while it is the way of life in the Indian society and hence attribute to the slow acceptance of Reverse Mortgage Scheme in India.
Also if you consider the tax-free lifetime annuity, Reverse Mortgage is a fairly good scheme to rely upon when the financial constraint is too high and there is no recourse. With such an option, the risk of living longer is also taken care of and hence with better pay-outs. The house ownership can always be claimed back by simply paying the loan availed. If an institution sells the house then cash surplus, if any, is then paid back to legal heirs. Despite its shortcomings in an Indian sentiments mind, the scheme in its current form in 2015 does provide a good option for retirees to plan their post-retirement income.