Reverse Mortgage Loan Products as Retirement Income Security Solutions for the Indian Market-Features and Risks

Reverse Mortgage (RM) is a promising financial solution to the elderly house owners who want to use their house to release the equity and obtain liquid funds to meet the urgent financial needs, without having to move out of the house or having to make any repayments, till the borrower and his/her spouse both die or the borrower sells the house or moves out permanently. Since bulk of the savings at retirement is typically locked in home equity, RM is a powerful device to increase the retirement income of the elderly. RM has been in existence in Europe for several centuries but in highly localised and personalised contexts. The modern version of the RM was introduced in U.S with the support of the Federal Government in late 1980s. Literature on RM is unanimous on its huge market potential. However, its complexity exposes a lender to several risks: primarily Mortality/Longevity Risk, Interest Rate Risk and Real Estate Market Price Risk. It is an unusual product for a typical elderly borrower, creating fears of debt burden, eviction and inability to bequeath property.

Demographic projections indicate that RM could have reasonable prospects in India, to begin with in urban areas of Kerala, Tamil Nadu, Goa, Chandigarh and possibly all metros. There are however no solid secondary data relevant to RM available. These include mortality amongst the elderly, current home ownership amongst the elderly, trends in appreciation in home value and long term interest rates. This paper deals with the Reverse Mortgage concepts in three parts. The first part highlights the important features of Reverse Mortgages. Part two presents the risks from lender’s perspective while providing elaboration for two of the critical risks - Crossover and Longevity. Finally, part three brings up the relevance of Reverse Mortgages to Indian market. The paper identifies a few potential target segments to enhance marketability of these products in India and suggests a survey be conducted to assess the potential in these segments in different geographies like Metros, Urban and Semi-urban areas and the survey results can be used to design new Reverse Mortgage products for better marketability.