In India, older citizens have various options for funding their post-retirement needs such as pension plans, fixed deposits, mutual funds, the older Citizens’ Savings Scheme, the Pradhan Mantri Vaya Vandana Yojana, annuities, and investments in real estate or gold.

Reverse mortgages are a unique option for older homeowners, allowing them to tap into the equity in their house to provide a regular income stream or a lump sum pay-out. This financial instrument provides much-needed assistance without the need to sell the house or make monthly mortgage payments, giving older individuals financial freedom.

A reverse mortgage is a financial instrument for homeowners who are 60 or older. It enables them to turn a portion of the equity in their house into a regular stream of income or a lump sum pay-out without having to sell the property or make regular mortgage payments. This helps senior citizens who own their own homes continue to be financially self-sufficient. Reverse mortgages are provided by banks and housing finance institutions and are regulated by the Reserve Bank of India. To develop the reverse mortgage market in India, the RBI first set guidelines for such loans in 2007.

Several factors influence the loan amount for a reverse mortgage, including the appraised value of the home, the age of the youngest borrower, current interest rates, and any existing mortgages or liens on the property.

Navigating the Challenges

There are certain challenges associated with reverse mortgage which need to be addressed. Many elderly homeowners are unaware of the concept.

Cultural and emotional factors play a significant role because owning a home is generally considered as a symbol of financial security, and generally the property is passed on to the next generation. So, many elderly homeowners are hesitant to use their property as security for a reverse mortgage for fear of jeopardising their children’s inheritance.

Further, the regulations and procedures for reverse mortgages are complex. While some banks and housing finance companies offer reverse mortgages, the number of institutions offering this service remains limited. Loan-to-value (LTV) ratios in India are often lower than in nations such as the US thus leading to a reduced percentage of the value of their property as a loan, which may not be enough to cover their financial needs post retirement. Obtaining accurate and consistent property valuations may be difficult, particularly for older properties.

Additionally, there are limited loan repayment options, for instance if the borrower’s heirs prefer to keep the property rather than sell it to repay the reverse mortgage, they may have difficulty obtaining alternative financing options because the Indian market for refinancing products is not as developed as in other countries.

To enhance the acceptance of reverse mortgage, there is a need for increased product awareness and comprehension among potential borrowers, simplified rules and procedures, and more competitive offerings from financial institutions. As the country experiences demographic shifts and changing social dynamics, the demand for financial products that offer support and independence for senior citizens is likely to grow.

Saravanan is a Professor of Finance and Accounting at IIM Tiruchirappalli; and Williams is a Project Manager-ESG at Good Vision Seva Trust