The Hindu Business Line : Lukewarm response to reverse mortgage scheme

Lack of awareness, high interest rates and a “mental block” among senior citizens who prefer that their houses are passed on to their children are some of the reasons for the lacklustre response, say officials with banks that have launched the scheme.

The scheme allows a senior citizen to receive a monthly payment from a bank or housing finance company in return for allowing the lender to possess the property after his or her death.

For the bank, the amount that it pays is a loan. It collects its loan plus interest by selling the property after the senior citizen passes away.

According to the rules, the maximum period for the loan is 15-20 years.

If the borrower survives beyond that, the bank will stop monthly payments, but can sell the property only when the borrower is no more.

The State Bank of India, which launched this scheme late last year, has given around Rs 200 crore under this scheme, said Mr Nanda Kumaran, Chief General Manager, Personal Banking. “While the reverse mortgage scheme is intended to be a security net for senior citizens, it has very little utility to a big majority of Indians,” he added.

Under the reverse mortgage scheme, the loan can be given only on self-acquired property. Most property in the country is ancestral and governed by inheritance laws, he said. This could cause legal hurdles for banks to possess the property after the demise of the borrower.

Punjab National Bank, the first bank to offer reverse mortgage, has done only about 100 cases in almost one year, said Mr B.K. Gupta, General Manager, Retail Banking.

Lack of awareness and societal norms work against the scheme. Most people want their property to go to their children after their demise, rather than give it up to the bank. It is now seen as an option, only if the person is driven to the wall, he said. Another reason for the scheme not gaining wide acceptance is that the monthly payments are low due to the prevailing high interest rate scenario, said Mr Kumaran. “You need a very low interest regime for reverse mortgage to succeed. The biggest problem for the scheme in India is from the discounting factor,” he said.

In order to fix monthly payments, the bank takes into consideration the current value of the house, adds the appreciation and discounts the interest rate. “As the interest rates are high, when you do the compounding, the property value becomes half in just six years,” Mr Kumaran explained.

Related Stories:
NHB talking to insurance cos to sweeten reverse mortgage
`Reverse mortgage scheme will take time to gain acceptance'
Reverse mortgage sans reverses
Reverse mortgage of property to help senior citizens
LIC Housing to offer reverse mortgage loans

More Stories on : Financial Services | Housing Finance

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Debt waiver: State co-operative banks find data collection difficult

Banks to stick to debt waiver schedule

LIC Housing Fin sets up financial services arm

ICICI Bank’s high networth individuals segment to grow 50%

Lukewarm response to reverse mortgage scheme

HDFC seeks to raise borrowing limit

BNP Sundaram MF in pact with J&K Bank

SBI, Union Bank hike lending rate by 50 bps

UCO Bank gets nod for follow-on public issue

Biometric ATM

‘India can grow at over 7% despite economic slowdown’

Call rate ends lower

UBI, Myanmar banks ink pact