Project Presentation On Reverse Mortgage in India

Presenter: Shaikh Azharoddin Shakeel. Roll No.03 MMS-II

Aim:
To Study the Concept of Reverse Mortgage in India and finding the merits and demerits behind the reverse mortgage as a regular source of income to old agers in India.

Objectives:
The objectives of project entitled as can be categorized as follows: To observe the return from RM , as a source of income to old agers.

The amount of risk involved in the REVERSE MORTGAGE With study of certain banks like PNB, LIC,UBI etc. 3

Research Methodology:
The data that is used in this project is of secondary nature. The data is to be collected from secondary sources such as various websites, journals, newspapers, books, etc.

Reverse Mortgage in India:

In 2007, the finance minister of India introduced a concept well-known and widely accepted in the West: Reverse Mortgage. A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan. 5

How does it work?

In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Installments (EMIs). In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.
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BORROWER
RML Payment Mortgage of House

BANK / HFC
Annuity Payment Premium amount for Annuity Purchase

LIFE INSURANCE COMPANY

Assured Life time payments till demise of surviving borrower. No repayments till borrower lives and occupies house. Single Collateral; Borrower liability not to exceed value of house. Loan settlement through sale of house. Heirs may repay without sale. Banks to receive servicing fee. Option to create a RM Redemption 7 Reserve.

key features:
1. Reverse Mortgage Loans (RMLs)
2. Eligible Borrowers. 3. Determination of Eligible Amount of Loan. 4. Nature of Payment. 5. Eligible End use of funds. 6. Period of Loan. 7. Interest Rate. 8. Security. 9. Valuation of Residential Property.

10. Provision for Right to Rescission:

11. Loan Disbursement by Lender to Borrower. 12. Closing. 13. Settlement of Loan . 14. Prepayment of Loan by Borrower(s) . 15. Loan Covenants. 16. Title Indemnity/Insurance 17. Foreclosure.
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Indian Market : Threats

Old age population. Joint families. Complexity of ownership. Absence of competitive suppliers of RM. Sources of Income Support for the Elderly in India . India specific legal and taxation issues
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Indian Market : Opportunities

Potential Market Segments. High House Equity. Low Current Incomes Relative to Desired Standard of Living . Long Tenure at Current Home. Lack of Other Supports. No Significant Bequeath Motive. Independence and Quality of Life.
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RM offerings in India:
SBI. UBI. DHFL. LIC Corp.

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Eligible Borrowers Lending Institutions Annuity Provider Borrower Interface

Senior Citizens above 60 years and spouse over 55 yrs Scheduled Commercial Banks and Housing Finance Companies Life Insurance Companies Only with Banks / HFCs

Security
Interest Rate

Mortgage of House Property in favour of Bank/HFC

According to Market Conditions
Borrower Age

60 to 70 years 60%

70 to 80 years 70%

80 and above 75%

Quantum of Loan
Loan to Value

Nature of Payment

Periodic - Monthly, Quarterly, Half-yearly or Annual Lump sum or Line of Credit, subject to terms. Combination of above.

Lump Sum
Reverse Mortgage Redemption Reserve (RMRR)

Upto 25% of Loan Amount, subject to terms of Lender.

Option for Bank/HFC to set aside up to 10% of loan amount as RMRR to address property price adverse fluctuation risk. To be adjusted with principal outstanding at time of loan redemption. 12

Risks to RM Lenders:
Mortality Risks. Interest Rate Risks. Property Market Risk. Moral Hazard Risk.

Liquidity Risks.
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Findings:
Reverse Mortgage arises as a regular source of income for the old age peoples. Terms and conditions are friendly with the loan taker. Tax advantage in terms of reverse mortgage. With certain precautions it is becoming regular source of income for the old agers as well as for others whom there are lack 14 of regular income .

Conclusions :
Offers an attractive option to the elderly to finance their consumption needs on their own. RM, if widely available, might in fact encourage more people in the working population to increase the proportion of their savings invested in housing.
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Suggestions:
Interest paid on reverse mortgage should be explicitly allowed under income from house property to give tax advantage to the borrower.
Instead of merely capping loan amount as a percentage of value, total outstanding including interest should be capped if the borrowers survive the term of loan. The borrower must undertake to pay the 16 difference from his other sources.

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