Reverse Mortgages in India: Loan against your home

We were asked to clarify issues surrounding reverse mortgages. Please note that each country will have specific features for the product that need to be understood based on where the property is situated. Our comments are specific to the product in India.

The National Housing Bank (subsidiary of Reserve Bank of India) has described the principles of the product in a presentation dated Feb 2007. The presentation is available at http://www.nhb.org.in/. To summarize, product features are:

1. Senior citizens in India are eligible. Main criteria are that one of the spouses needs to be a senior citizen and house where they live in India needs to have been fully paid up. Income criteria is not to be used for this loan

2. Loan is for a max term of 15 years and will be against the house they currently live in. Typically, the husband and wife will be co-borrowers

3. In this type of loan, a bank or housing finance company (HFC) in India is to grant the loan to the borrowers in either a lump sum or in various instalment modes (e.g. monthly, quarterly, etc)

4. Loan amount will depend on age of main borrower and value of the property

5. Loan can be used for living expenses, renovation of home or other purposes

6. Borrowers do not have to service the loan for the term - i.e. no interest payment or principal repayment is expected for the 15 year term

7. Borrowers are expected to pay back loan principal + accumulated interest at the end of 15 years. Each financial service institution retains the right to set interest rates

8. Should the main borrower die before the 15 year term, his/her spouse can continue to live in the property till either he/she also dies or term is up. Should both spouses die before the end of the 15 year term, the bank or HFC will give the first right to settle the loan to the borrowers' heirs. Should this not be possible, the bank/HFC will sell the property, clear the loan outstanding (principal + interest) and return the balance to the borrower's estate

9. Other events that can trigger a full payment of loan outstanding is the sale of the property by the borrowers or them moving out to live elsewhere

10. The loan can be paid off at any time without any prepayment penalties.

While this product is expected to be valuable to senior citizens who have cash flow problems, main issue is the risk of them outliving the 15 year term. Should this happen, they will have to pay back the loan outstanding. As they took the loan in the first place to bolster cash flow, it is not clear where they will get the money to settle the loan ! Therefore, one needs to exercise care in using this product like any other debt product - unless repayment sources are clear, debt can be a difficult thing !