Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
HIGHLIGHTS
- Senior citizens are not comfortable paying monthly repayments to the lenders who offer traditional mortgages due to a range of financial challenges
- Financial institutions must make use of this choice as an opportunity and leverage their products which are more appealing to this group.
- These products will help to capitalize the silver economy and general working-class economy, drive cross-selling opportunities, catch regulatory tailwinds and government support, and finally support brand positioning as a comprehensive financial partner.
Current gap
Many older adults are ‘house-rich, cash-poor.’
Adults over the age of 60 years can face a range of financial challenges, often due to multiple problems like healthcare costs, social security dependence, loss of income from spouse, limited ability to work, changes in family dynamics, emotional and psychological stress, increased risk of outliving savings and finally and most crucially, inadequate retirement savings. Hence these groups may not be comfortable in paying monthly repayments to the lenders who offer traditional mortgages.
Many older adults are ‘house-rich, cash-poor.’ They may have valuable homes but little liquid cash. Financial institutions and lenders across the globe should consider this an opportunity and focus on these customers, and leverage products which are more attractive to this group.
In most developed and developing countries the aging population outnumbers the younger generation, especially in large countries like China. Lenders should factor in these demographic changes across the globe.
Solution
Financial institutions and lenders can offer either reverse mortgage or shared appreciation mortgage as powerful tools that can help seniors in this evolving financial landscape. From a business and strategic standpoint, lenders offering these mortgage types can focus on several key objectives such as generating long-term revenue streams, managing risk, and catering to the financial needs of older homeowners.
A reverse mortgage or a shared appreciation mortgage allows homeowners to convert the equity in their homes into cash, either in a lump sum or through a line of credit. This can provide a steady source of income or cover future expenses as one ages, without the need to sell the property immediately. They ensure that these individuals can continue to support themselves financially without needing to rely on traditional retirement savings.
Benefits
The reverse mortgage can be structured in ways that suit the borrower’s needs—whether as a lump sum or a line of credit. This flexibility allows the borrower to tailor the loan to their unique lifestyle and financial goals. If they wish to continue part-time work in their later years to help pay off the loan, that’s an option. However, if they prefer to fully retire and not worry about the repayment, they can simply hand the property back to the lending institution, relieving themselves of the financial burden.
Meanwhile, in the shared appreciation mortgage, the lender provides a loan for part of the home’s value in exchange for a share in the home’s future appreciation. i.e., when the homeowner sells the property, the lender receives a percentage of the increase in the home’s value. Since the home needs to be sold, the borrower may need to opt for another house with the available equity in hand.
Conclusion
From the financial institution’s perspective, these products will help to capitalize the silver economy and general working-class economy, drive cross-selling opportunities, catch regulatory tailwinds and government support, and finally support brand positioning as a comprehensive financial partner.
Also, one of the biggest benefits is that these financial institutions can add these types of mortgages in their existing suite of products and target countries across the globe, especially to emerging markets like India that are yet to be fully explored. Regulatory bodies in these unexplored markets should adopt some good practices (such as inclusion of ancestral properties etc.) from already well-established markets like the US, where the above products have already captured a significant share of mortgage revenue. Moreover, lenders should start advertising more about reverse and shared appreciation mortgages so that everyone is aware that these products are available in the market.
