A SWOT analysis on reverse mortgage loans

The draft operational guidelines circulated by National Housing Bank (NHB), lays down the various aspects of reverse mortgage loans for senior citizens.

Under this scheme, any senior citizen owning unencumbered residential property in India can mortgage such property for a loan, to tide over expenses in their twilight years. Here's a SWOT analysis of the same.

Strengths

• The senior citizens are entitled to regular cash flows at their choice - monthly, quarterly, half yearly and annually. 
• The loan is given without any income criteria at an age where normal loans are not available.
• No loan servicing or repayment required during the lifetime of borrower and spouse.
• If the borrower dies during the period, the spouse will continue to get the loan amount for 15 years.
• Tax treatment of a RML will be as loan, not income, so no tax will be payable on the regular cash flows.
• The borrower and their spouse can continue to stay in the house till both die.
• Heirs of the borrower will be entitled to get the surplus of sale value of the property.
• Borrower/heir can get mortgage released by paying loan with interest without having to sell property at any time. Prepayment of loan is allowed.
• NHB to guarantee obligation of banks/housing finance companies to pay the committed loan amount as regular sums over a period of time.
• Reassessment of property value will be done periodically, or at least once every 5 years.
• Borrower can cancel the mortgage within three days of approval/disbursement, subject to return of loan amount.

Weaknesses

• This loan product has a maximum tenure of only 15 years. If the borrower outlives this period, the regular cash flows will stop.
• Basis of property valuation is not clear.
• Requirement of clear title to property in the name of the borrower to get the loan.
• Three days period to cancel loan is too less. Should be at least 15 days to go through the fine print.
• Various fees to be added to borrowers liability, which can be quite substantial.

Opportunities

• Partial substitute for a social security scheme for senior citizens.
• Longevity increasing with nuclear families. However, medical expenses and cost of living going up, increasing the need for additional income in old age.
• Most Indians have strong preference for own home. Therefore many eligible citizens may opt for the scheme.
• Quantum of loan can increase favourably for borrower on revaluation of property.

Threats

• Property valuations are ambiguous.
• There is a non-recourse guarantee, which means that loan plus interest should never exceed realisable value of property. In case of fall in property value or loan with interest exceeding assessed property value, banks may resort to strong-arm tactics to force the borrowers to move out, if they live too long after the loan period is over.
• Rate of interest is at the discretion of lender. Any increase in the rate, if floating, will increase the burden of the borrower.
• Lender has discretion to raise loan amount on revaluation. However, if it does not do so, borrower doesn't get loan according to proper value of property.
• Lender has right to foreclose loan by forcing sale of property if borrower doesn't pay for insurance, property taxes or maintain and repair house. Can lead to further harassment.
• This product seems very good in theory and can be of great help to senior citizens who can live in their own houses and yet avail of a loan against it. However, the norms need to be fine-tuned and made watertight so that these borrowers are not harassed or short-changed in their old age.