REVERSE MORTGAGE

Have the Cake and Eat it too

PROF CHOWDARI PRASAD
 Housing in India
 A basic human necessity supporting economic activities
 Second largest employment generator, next to agriculture.
 Has forward and backward linkages with over 250
ancillary industries.
 Every Rupee spent on construction, an estimated 75-80
paise is added to GDP.
 GOI created enabling Fiscal, Monetary and Legal
Environment
 Housing Industry Growth in last 5 years –
Physical Terms 3.0 % p.a.
Financial Terms 30% p.a.
 Contribution of Housing in GDP is about 6%
 Percentage of Mortgage Debt to GDP is 8.50% (E) in 2005-
06, still way below China’s (12%), Malaysia (22%), Hong-
Kong (40%) and US (65%).
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 Introduction
• What is Housing Finance ?
– Construction of a House / Flat
– Purchase of land/ ready house / flat
– Extension of existing house / flat
– Regn/ Repairs, renovation of a house / flat
– Furnishing /Insurance / Home Equity/ Rentals
– Shopping Complex, Schools, Hospitals
– Co-operative Housing Society,
– Construction of Workers / Employees Qrtrs
– And now… REVERSE MORTGAGE LOANS!
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Why take a Housing Loan ?
• Roti, Kapda aur Makaan ! Build a shelter !!
• A real saving for any class individual
• An asset always likely to appreciate
• Compare with several other savings
• Easy to acquire, repay and transfer
• A good tax savings facility
• A decent line of business in modern days
• And now RML…. To maintain decent living
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 Who can be Applicant ?
• Any Individual ?
– Salaried/ Self-employed / Businessman /
Professional / Agriculturist / Artist / etc ..?
– Non Resident Indian ??
– Jointly with Spouse / Father / Son or others ???
• A Firm / Company /Trust / Hospital etc ?
• A Co-operative Society?
• Industrial Estate / Builder-Contractor ?
• And now………. SENIOR CITIZENS
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 Why H F by Banks in India ?
• To conform to National Infrastructure Policy
• Also to Housing and Habitat Policy of GOI
• Permitted line of developmental activity
• A modern day retail banking instrument
• Backed by secure / tangible asset
• Sentimental loans; Assured repayments
• Easy to recover dues thro’ legal methods
• Refinance from NHB and RBI / NABARD
• Part of Priority Sector Lending (40%)
– Rural : Rs 5 lacs and Urban : Rs. 10 lacs
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 HOUSING FINANCE MARKET
LIC : Life Insurance Corporation of India GIC : General Insurance Corporation of India
CHFS : Co-operative Housing Finance Societies

Households, Corporations, Trusts, Provident Funds

Government Reserve Bank External

of India of India Sources

Scheduled
State LIC/ Banks
Governments GIC

NHB

State Apex CHFS

Housing &
Housing
Urban Devpt. Public, Pvt. Agencies/ Finance
Corporation SHGs/MFIs
Primary CHFS Companies

Households & Corporations

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 What formalities ?
• Application ?
• Enclosures :-
– Estimate / Land papers / Plans / Designs –
approved by Municipal or Town Planning Dept
– Salary Certificate / IT-ST-Wealth Tax Assessment
– Partition / Gift / Sale Deed ?
– Duplicate papers ? In Vernacular Language ?
– Agricultural / Urban Land ?
– Proof of residence ? Guarantors ?
– Builders’ Credentials ?
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How much?
• Type of Loan ?
• Eligibility ? Margin ?
• Rate of Interest ? Fixed or Floating ?
• Security ?
– Equitable / Registered (Simple) Mortgage ?
– Third Party Guarantee ?
– NOC / No Dues / Letter of Undertaking ?

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 MORTGAGE – Transfer of
Interest in an immovable
asset viz., land, building, etc

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 Transfer of Property Act, 1882
• Sections 58 a, b and c…..
• A mortgage is the transfer of an interest in
specific immovable property for the purpose
of securing the payment of money advanced
or to be advanced by way of loan, an existing
or future debt, or the performance of an
engagement which may give rise to a
pecuniary liability.
• Mortgagor, mortgagee, m-money, m-deed…
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 Table 1.2 -Retail Portfolio of Banks
(Amt in Rs Crs) – T&P OF BKG IN INDIA 2005
S Item March March %Vari-
No 2004 2005 ation
01 Housing Loans 89,449 1,34,653 50.5
02 Consumer Loans 6,256 3,810 -39.1
03 Credit Card Dues 6,167 8,405 36.3
04 Other Per. Loans 87,170 1,20,120 37.8
05 Total Retail Lns 1,89,041 2,66,988 41.2
06 Total Loans 8,64,271 11,05,725 27.9
07REVERSE
% of (5) out of (6)
MORTGAGE 21.9
FDP BU BLR 24.1 15
 Table 1.3 - Personal Loans
(ET dt August 17, 2007) Rs Crs
Particulars Oct 2006 Dec 2006 May 2007
Retail 3,98,055 4,27,909 4,55,439
Loans
Housing 2,09,468 2,17,829 2,30,751
Agst FDs 33,744 35,764 39,092
Cr Cards 11,870 11,913 14,221
Education 12,692 13,399 15,438
Con Dur’ble 9,291 8,558 8,831
Others 1,20,990 1,40,446 1,47,106
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 EGAGTROM ESREVER?
• What is Reverse Mortgage?
• Who is the Mortgagor?
• Who is the Mortgagee?
• What is being Mortgaged?
• What is Reverse Mortgage
Loan Scheme?
• Who formulated the
Scheme? When? Why?
• How is it implemented?
• Who repays the RML?
When? How?
• Which Banks / Others
launched it in India?
• What are the issues? Legal,
Taxation, Insurance, Risks..?

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 What is Reverse Mortgage?
• Definition : www.investorwords.com
• An arrangement in which a homeowner
borrows against the equity in his/her home
and receives regular monthly tax-free
payments from the lender.

• Also called Reverse-Annuity Mortgage or

Home Equity Conversion Mortgage (HECM)

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 Table 1.4 : Population Ageing in Selected Countries
Population (In Millions) % of Population Over 65 Pop’n over 65 (No’s in Mn)

YEAR 2000 2030 2000 2030 2000 2030

China 1262 1483 7.0 16.0 88 237
India 1014 1437 4.6 9.0 47 129
USA 276 351 12.6 20.0 35 70
Indonesia 225 313 4.5 10.9 10 34
Brazil 173 203 5.3 13.2 9 27
Russia 146 133 12.6 20.5 18 27
Japan 127 117 17.0 28.3 22 33
Thailand 61 71 6.4 16.4 4 12
France 59 62 16.0 24.0 9 15
UK 60 61 15.7 23.5 9 14
S.Korea 47 54 7.0 19.5 3 11
Malaysia 22 35 4.1 9.4 1 3
Australia 19 23 12.4 21.1 2 5
S’pore 4 9 6.8 14.8 0 1
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 Proportion of
Elderly in Population
Philippine 7.7
India 9
Malaysia 9.4
Indonesia 10.9
Brazil 13.2
Singapore 14.8
China 16
Thailand 16.4
S.Korea 19.5
USA 20
Russia 20.5
Australia 21.1
UK 23.5
France 24
Germ any 25.8
Japan 28.3

0 5 10 15 20 25 30
2000 2030

Source: An Ageing World, 2001, US Census Bureau

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 Demographic Trends
Implications for India
• In 2030, 9% of India’s population, or nearly 130
million people, will be over 65 years of age. The
population over 60 years of age will approach 200
million in that period

• By 2030, 237 million people, or 16% of China’s

population will be over 65 years of age

• The vast numbers of elderly adds a human

dimension and imposes a significant responsibility
on the part of those who are involved in managing
retirement funds and systems

• How Asia addresses the challenge will largely

determine how the world will cope with ageing
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Life Expectancy at age 60: Selected Asian
Countries (Source: Adopted from Chakraborty (2004))

Indonesia 17
16

India 17
16

Philippines 18
16

Malaysia 19
17

China 19
16
21
Thailand 18

Singapore 22
19

Japan 25
21

0 5 10 15 20 25 30
Male Female

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 RML is .................
• A reverse mortgage is the exact opposite of a
normal mortgage transaction (hence the name
reverse mortgage) but restricted to a housing
property
• A normal mortgage transaction involves the home
being mortgaged by the borrower to the lender
as a security for the loan. In a normal mortgage
transaction, banks and home finance companies
have to consider the borrower's income and
repayment capacity to determine the loan
amount, duration and the monthly repayment.
• However, in a reverse mortgage (popular in USA,
UK and Canada) the lender instead of paying
upfront, pays the borrower a sum every month
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 RML – History
• Started in 1980s in USA as “reverse
mortgage” known as Home Equity
Conversion Mortgage;
• Providers were Banks and specialist
reverse mortgage finance companies;
• In UK, it is known as “Equity Release or
Home Income Plans” mainly provided by
Insurance Companies;
• In Canada, both banks and insurance
companies are involved.

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 Origin of RML Scheme
• Senior Citizens – Old Age Dependency
• Increase in Longevity and Low Mortality
• Rising Cost of Good Health Care
• No proper Social Security Systems
• Regular Income flow + Pensions (?)
• Biggest Savings / Asset / Wealth
• Increase in residential house prices

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 What is RML?/1
• RML seeks to monetize the house as an
asset and specifically the owner’s equity in
the house
• Senior Citizen borrowers (SCB) mortgage
the house property to a Public Lending
Institution (PLI), who then makes periodic
payments to borrowers during the latter’s
lifetime
• SCB not required to service the loan and
hence no EMIs – Principal or Interest!
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 What is RML?/2
• On borrower’s death or leaving the house
property permanently, loan is repaid along
with accumulated interest, through sale of
the house property
• SCB/Heirs can prepay the loan with intt.
• Mortgage on property can be released
• FM announced in 2007-08 Union Budget
• NHB issued Guidelines on May 31, 2007
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 Eligibility of Borrowers
• Senior Citizen of India – above 60 years age
• Married Couples as joint borrowers
• Should be owner of a self-acquired, self
occupied residential property (house or flat)
located in India, with clear title of ownership
• Property should be free from encumbrances
• Residual life of property be at least 20 years
• Borrowers should use the property as
permanent primary residence
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Eligible Amount of RM Loan/1
• Depends on Market Value of Residential
Property and prevailing rate of interest

Age Loan as proportion of

Assessed Value of Property
60 – 65 40 %
66 – 70 50 %
71 – 75 60 %
Above 75 70 %

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Eligible Amount of RM Loan/2
• The above table is indicative
• Banks / PLIs have the discretion
• Methodology adopted to be disclosed
• PLI to ensure that Equity of the borrower
in the residential property (Equity to Value
Ratio – EVR) does not fall below 10%
• PLI to re-value the mortgage-property at
intervals – at least once in every five years
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 Nature of Payment
• Any or Combination of the following:-
– Monthly, Quarterly, Half-Yearly or Annually
– To be decided with prior / mutual consent
• Lump-sum payments in one or more tranches
• Committed Line of Credit, with an availability
period agreed upon mutually (Borrower and
PLI), to be drawn down by SCB
• Lump-sum may be conditional and limited to –
for medical exigencies, home improvement,
maintenance, up-gradation, renovation,
extension of residential property – Option given
to SCB
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 Eligible End Use of Funds
• Upgradation, Renovation and Extension
• Home improvement, maintenance /
insurance of residential property
• Medical, Emergency expenditure for family
• For supplementing pension / other income
• Repayment of an existing loan taken ...
• Meeting any other genuine need
• NOT FOR ANY SPECULATIVE PURPOSES
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 OTHER TERMS
• Period of Loan: Maximum of 15 years
• Interest Rate: To be fixed by PLI as usual
• Security: Mortgage of Residential Property
• COMML. PROPERTY IS NOT ELIGIBLE
• Valuation: Local Laws to be complied with
• Assessed by external Approved Valuers
• Revaluation to be carried out every 5 years
• Best commercial judgement; no future values
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 Right to Rescission
• PLIs to maintain Customer friendly gesture
• To follow international best practices
• SCBs to be given three days time after
finalisation of RML to cancel transaction
• Even amount is disbursed, may be repaid
• Interest for the period may be waived

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 RM Loan Disbursement
• Direct to the borrower, except in case of
adjustment for existing debts, payments to
contractors, of taxes or insurance premium
• Settlement of dues to other PLIs...
• Periodicity: Mly, Qly, HYly, Annually - Cash
• PLI to decide mode of payment, loan tenor,
etc depending upon market value, age of
borrower and other factors
• All facts to be disclosed to the borrowers
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 Closing
• PLIs to provide in writing, a fair and
complete package of RML and specimen
documents covering all aspects
• A tool kit with illustrations be prepared
• Closing charges to be borne by SCBs
• These are – Appraisal fees, Inspection fees,
Verification charges by External firms, Title
Examination fees, Legal charges, Stamp
Duty and Registration Charges, Property
Survey and Valuation Charges, etc...
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 Settlement of RM Loan
• Loan becomes due and payable only when
the last surviving borrower dies... Or would
like to sell the home, etc...
• Amounts to include accumulated interest
• SCBs may settle dues without sale of asset
• Reasonable amount of time, say up to 2
months be provided to settle RML dues
• Balance / surplus, if any, after settlement of
loan be passed on to the estate of borrower
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 Pre-payment of RM Loan
• Borrower will have option to pre-pay the
RML at any time during the loan tenor

• There will not be any prepayment levy /

penalty / charge for such payments

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 RM Loan Covenants/1
• SCB will continue to use the property
• Non-Recourse Guarantee = No negative
equity – SCB will never owe more than net
realizable value of the property…
• Loan Agreement – to be entered into
• SCB shall not make any testamentary (will)
disposition of the property during loan is due
• Even if done, it is subject to the mortgage…
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 RM Loan Covenants/2
• PLI may obtain a Registered Will
• Such Will, is the last “WILL” for availing RML
and that no other Will be made again
• SCB to insure property against fire,
earthquake and other calamities
• To pay all taxes, electricity charges, water
charges and other statutory payments
• To maintain the property in good condition
• PLI reserves the right to inspect property…
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 Foreclosure
• PLI may foreclose the RML for defaults
• If SCB has not stayed for one year period
• If SCB fails to pay taxes or maintain or insure
the property…
• If SCB declares himself bankrupt
• If property is donated or abandoned
• If ownership changes, rented out, etc…
• In case of fraud or misrepresentation..
• Any statutory action by Govt for taking over the
property for public use or for condemning asset
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 Option to adjust Payments
• PLI has option to revise periodic or lump-
sum payments or frequency or intervals on
account of revaluation at every 5 years;

• Borrower is given option to accept above..

• If not acceptable, further payments will be

stopped by PLI. Amount outstanding will
attract interest at agreed rates;
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 Counseling and
Information to Borrowers
• PLI to observe / maintain high standards
• To disclose all terms without ambiguity
• To clearly explain all terms / conditions
• To suggest to SCBs to nominate relatives
• To counsel possible impacts/ intt. Changes
• To counsel about possible price changes
• To specify all the costs associated with RML
• Take all possible steps to treat SCBs fairly
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 Illustration/1
• Age of an Senior Citizen Borrower : 65 years
• Value of House Property Assessed: Rs 40 Lacs
• Period for which eligible: 15 Years (180 months)
• Eligible Amount of Loan: 40% of Market Value
• Reverse Mortgage Loan: Rs. 16 Lacs
• Mode of payment : Rs. 8,000 every month
• Rate of Interest : x% pa (Fixed or Floating?)
• Total Principal amount received: Rs. 14.40 Lacs
• Assumption: No effect of changes in value of property
during pendency of the loan (15 years)

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 Illustration/2
• Gross Interest on Rs. 14.40 Lacs –
compounded annually : Rs. 21.38 Lacs
• Total amount due to Bank: Rs. 35.78 Lacs
• If SCB dies at the end of 15 years, bank
sells house property, realises the dues and
releases the balance, if any, to legal heirs
• If Legal Heirs want to retain the property,
entire dues of Rs. 35.78 Lacs may be paid
to the bank and complete legal formalities.
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 RML in India/1
• Oct 18, 2004 : Why we need Reverse Mortgage?
Article in www.domain-b.com by V Jagannathan
• August 31, 2006 : Dewan Housing Finance Ltd
introduces RML Scheme by name “Saksham”
• Feb 08, 2007 : XL Dynamics-India Reversesoft
• Feb 28, 2007 : FM’s 2007-08 Budget Speech
• Feb 2007 : National Housing Bank prepares
Draft Guidelines of Reverse Mortgage Scheme
• April 14, 2007 : PNB, 1st Public Sector Bank to
announce Reverse Mortgage Loans (Baghban)
• May 2007: NHB Guidelines revised.....
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 RML in India/2
• June 5, 2007 : ICICI, BOB and OBC offer RMLs
• Also to start : Allahabad, Indian & Corp Bank
• June 15, 2007 : LIC Housing Finance Ltd.
• June 19, 2007 : Nucleus Software announces
new software
• July 30, 2007 : Union Bank of India to launch
• July 31, 2007 : Operational Guidelines from
NHB to PLIs
• Oct 12, 2007 : State Bank of India announces
• Nov 01, 2007 : Central Bank of India launches

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 References
• www.nhb.org.in; www.domain-b.com;
• www.google.com; www.rediff.com
• www.reverse.org; www.investorwords.com
• www.reversemortgage.org
• www.apnaloan.com for FAQs
• www.iloveindia.com/real-estate/reverse-mortg
; www.financialexpress.com
• www.tapmi.org/paper1/rr.rtf
• www.thehindubusinessline.com;
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