Sucheta Dalal :The older you get...
Sucheta Dalal

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The older you get...  

Sep 5, 2005


A smart, single, successful, forty-something woman friend who takes home a six figure pay-check every month has a major problem. No, she is not looking for a husband, nor is she worried about hanging onto her job. Her single biggest worry is, ‘‘How much of saving is enough to pay my medical bills and let me maintain the life I am used to when I am older?’’ So far all her savings have gone into a nice apartment in a tony Delhi neighbourhood, which she can really claim as her own after two more years of paying Equated Monthly Installments (EMIs). Her old age savings programme will have to start after that.


But there are several problems. In the absence of government-funded social security, she is adamant that her old-age savings must be entirely risk- free. Past experience with a mutual fund scheme and a company fixed deposit have frightened her and she won’t even hear about pension fund schemes that will invest her retirement savings in the capital market.


On the other hand, the government has capped investment in Reserve Bank bonds and bank deposit rates barely keep pace with true inflation. Looking around, I find that this growing sense of panic about old age security is not restricted to the single or separated set.


An increasing set of Double Income No Kids (Dinks) couples share the same worries, as their apartment and high maintenance lifestyles swallow a big chunk of current income. Then there are the retired folk whose children live separately and have little time for their parents; and those retirees whose home/apartment has gobbled their entire savings, leaving them dependent on their children for day-to-day expenses. The children, in turn, squabble over the apartment and harass the elderly for everyday expenses.


The availability of easy housing finance has certainly provided a large swath of middle-class India the security and permanence of their own homes but it also comes with the companionship of mortgage payments that last for several decades. This means that yuppie, forty-somethings are often just as insecure as the generation that invested their entire provident fund in building post-retirement homes.


The answer to this dilemma, in the absence of funded old age social security schemes, is Reverse Mortgage products. The good news is that they are particularly suited for older people. Reverse Mortgage (RM) products allow individuals to get liquid funds against the value of their homes, without having to make any repayment until he dies or sells the house (there is a large menu of products in the international market to suit various needs).


To put it simply, this is the reverse of a regular mortgage or, in case of some products, it is the reverse of life insurance. Instead of individuals paying a regular premium to the insurer, in order to secure the lives of their loved ones, an RM product allows people to collect liquid funds for their routine needs and medical expenses against the value of their homes.


The deal ends on the death of the RM buyer with the lender taking possession of the home. The lender calculates risk on the basis of mortality, interest rates and the potential fluctuation in the real estate prices, which is a complex and tricky business.


The amount of loan, or monthly annuity will depend on the age of the borrower, the value of property and interest rate trends. In fact, the older the person and lower the life expectancy, the more attractive will be the terms of the product. The terms of the loan usually insist on proper maintenance of the property.


Although RM products have existed in the US and Europe for decades, the need for their introduction in India has increased over the last few decades. As Indians move out of joint family structures or choose to remain single or childless, the market is ripe for the introduction of RM products.


At a time when a growing mass of individuals have meagre post-retirement savings (because they live with multiple mortgage payments all their lives) or are increasingly harried by high medical costs and capricious medical insurance rules, RM holds out the promise of a dignified retirement, where they don’t need to sell their homes to pay their bills.


Curiously, insurers and banks that have explored the suitability of RM products seem unanimous about its huge market potential. However, no one has attempted to address the legalities and taxation issues involved in launching the product.


A few years ago, ING Vysya Bank commissioned a desk study by the T.A. Pai Management Institute to explore the possibility of introducing RM products in India. But the bank does not seem to have followed it up with a market exploration product.


So far, the government has focused all its attention on a pension regulatory authority and the introduction of a variety of pension products and schemes. This ignores the fact that there will always be a significant class of people who are completely distrustful of capital market products and only invest in fixed assets. The RM products also answer a core sentimental attachment that people have to their homes.


On the other hand, seeking an RM product has a sense of finality to it and it will have to be marketed sensitively. Ideally, the government could introduce RM products through a public sector institution and let in private players after an initial test-run and demonstration. The US Department of Housing and Urban Development adopted this approach by launching a demonstration product (called the Home Equity Conversion Mortgage insurance) in 1991. This programme was made permanent in 1998 when the evaluation of its operation was declared a success and claimed a high level of satisfaction among borrowers.


Interestingly, the T.A.Pai institute’s desk study concluded that RM could emerge as the fastest growing product in the world based on demographic projections. And that it is bound to attract increasingly favourable public attention and could encourage greater investment in housing products. [email protected]


-- Sucheta Dalal