A home is a big financial asset that you can use or sell to create liquidity anytime in your life. If you are retired, you can use your home to mortgage it with the bank and get a loan when you have a financial emergency. What if you want a regular income? For that too there is a product called “reverse mortgage” that can help you create a regular income according to the valuation of your property. Reverse mortgage is not a new product in the Indian market but it has failed to draw attention of the senior citizens. There are many reasons for its failure. Let’s understand why reverse mortgages have failed to take off in India.
High Interest Rate Compared To Other Loan Options
Interest on reverse mortgage loans ranges from around 10 per cent to 11 per cent p.a. under a floating rate system. Banks also offer reverse mortgage loans with a fixed rate system which is charged higher than the floating rate system. The interest rate usually varies from bank to bank and depends on factors such as margin rate, loan amount, etc. If compared to other secured loans, the interest rate on RML is a little higher. For example, interest on a loan against property starts at around 8.7 per cent p.a. and a loan against securities starts at around 9 per cent p.a. So, RML are expensive product for senior citizens and this is one of the reasons that they are not interested in it.
High Margin Charged By The Banks
The margin on RML varies depending on property age, location, age of the borrower, etc. The margin ranges around 35 per cent to 55 per cent of the property value. It means if the value of the property is Rs 1 crore, the borrower will get only Rs 45 lakh to Rs 65 lakh as loan. On the other hand, one can get a higher loan on the same property through a loan product such as a loan against property (LAP).
Complex To Understand For Senior Citizens
Unlike other loan products, it’s not easy for senior citizens to understand the RML. In RML, the borrower doesn’t get the entire loan amount upfront but they partially receive the lump sum amount and rest as monthly installments that continue till the tenure of the loan. At the end of the tenure, the installment stops but the borrower can continue to live in the house till death. The borrower or on the death of the borrower their legal heirs have to repay the loan amount to get the property back from the bank, or else the bank can claim its ownership.
There are several other issues as well linked with the reverse mortgage loan that makes it unattractive for retirees. Even if the value of the property increases after a few years, the bank doesn’t automatically increase the loan installment unless there is a periodic revaluation. Seniors often find options like LAP, property downsizing or shifting to a rented property by selling the home to be better compared to the RML.
