REVERSE MORTGAGING

Presented ByDIVYA VERMA NOOPUR GUPTA PREETI DHARMENDER ROHIT

A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. It provides income that people can tap into for their retirement.

REVERSE MORTGAGING

Traditional Home Loan

Reverse Mortgage Loan

One buys a house using home loan Every EMI one pays increases his/her equity in the house Sufficient income is required to service the debt i.e. to pay EMI

One pledges the house he/she owns for a RM Loan The equity in ones house decreases No income is required as no repayment is required

REVERSE MORTGAGING

Any house owner over 60 years of age is eligible for a reverse mortgage. The maximum loan is up to 60% of the value of residential property. The maximum period of property mortgage is 20 years with a bank. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

REVERSE MORTGAGING

The revaluation of the property has to be undertaken by the bank once every 5 years. There is no tax on the amount received through mortgage. Reverse mortgage rates can be fixed or floating.

REVERSE MORTGAGING

RM Loan was introduced in India in 2007 Punjab National Bank was the first Public Sector Bank to come out with a Reverse Mortgage concept based product for senior citizen titled PNB Baghban. Eligibility Criteria: The borrower should own the residential house/flat; Should be an India citizen; & Should be 60 years & above.

REVERSE MORTGAGING

Qualifying/ Maximum Amount Of Loan: The qualifying amount of loan will depend on the realizable value of residential property, after maintaining margin of 20%. The maximum qualifying amount of loan shall be restricted to Rs. 100 Lacs (along with interest).

REVERSE MORTGAGING

Disbursement / Tenor Of Loan: The loan shall be extended as regular fixed monthly payments during the loan period. i.e. 1020 years or till the death of the last surviving spouse, whichever is earlier. Reimbursement: Loan to be recovered only after the death of both the spouses & no loan repayment during the lifetime of borrower.
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Senior citizen lives in his/her own house, needs better cash flow

Pledges rights to the property to the bank in return for regular income Bank values house; loan amount is usually 90% of the house value for traditional reverse mortgages (RM) loans & 60% in case of annuity RM

Monthly income stream starts. Income can be spilt between an initial lump sum & monthly stream
After 20 years, the income stops but the customer can occupy the house till death. In case of annuity, the customers receives payment till death The heir(s) have the option to pay back the loan amount & retrieve the house, or let the bank take over the property
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Punjab National Bank (PNB) National Housing Bank (NHB) Dewan Housing Finance Limited (DHFL) State Bank of India (SBI) Indian Bank

Central Bank of India LIC Housing Finance Andhra Bank Corporation Bank Canara Bank

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No risk of default as there is no possibility of nonpayment unlike a home equity loan. With RML, borrower will never owe more than the home's value at the time the loan is repaid, even if the lenders have paid him/her more money than the value of the home. The amount received through reverse mortgage is considered as loan & not income; hence it is tax free.

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Borrower can choose to receive loan money in any form such as: lump sum, annuity, credit line or some combination of the above. There are no income qualifications to get a Reverse Mortgage. With a RM Loan, one retains home ownership & the ability to live in ones home & for as long as one wants.

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With increasing life expectancy the loan tenure of 20 years is too short, seniors who avail the facility at the age of 60 foresee a discontinuation of income at the age of 80. Reverse mortgages are subject to higher interest rates than most other types of mortgages. Use of funds is directed by banks i.e. funds are not allowed to be used for reinvestment or business purposes.

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The equity one holds in their home decreases as the interest on the RM accumulates over the years. The LTV is low, a senior who avails this facility, usually gets lower than 70 percent of the value of the house. Binding usage of property i.e. the eligibility criterion requires the senior to primarily reside in the property which is mortgaged. The senior has no option of earning additional income from the house by renting, etc.
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Negative Introduction of RM Loan can lead to a diminished growth of the charitable institution which are started/operated largely from the trusts that older generations have left behind. The issues of fraud & the safety of the elderly is another area of concern.

Positive

Indians have a desire to bequeath property to their heirs, however social behavior is changing with the economic development & the financial independence of the younger generation. In the time of medical emergency or other financial need senior citizens can take advantage of the equity in their homes & need not be dependent on their offspring.
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Bad & negligible marketing. Reluctance in taking loan on against the most valuable & emotional asset - home. The borrower cannot sell, rent or move out of the home. Origination costs are very high & become part of the initial loan balance & accrue interest. If the borrower outlives the fixed loan period, the regular cash flows will stop. Borrower can only use the funds for purposes such as upgradation/ renovation of residential property, medical exigencies i.e. use of RM Loan for speculative, trading & business purposes is not permissible.

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Alteration of the eligibility criteria which requires the borrower to primarily reside at the mortgaged residential property. Removal of the criterion which directs the use of funds to the borrower. There should be complete transparency & clear cut regulatory norms for benefit of burrower. Aggressive marketing measures have to be taken up to bring the conceptual awareness.

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