Financial freedom through reverse mortgage

3,002 views
2,849 views

Published on

Financial freedom through reverse mortgage

Published in: Business, Economy & Finance
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
3,002
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Financial freedom through reverse mortgage

  1. 1. Financial Freedom Through Reverse Mortgage Introduction 1.1 Introduction to Reverse Mortgage The world population structure shows that population worldwide is ageing due to increased longevity of older people and decreased birth rates in developed and most developing countries. In India alone, statistics show that number of elderly as a proportion of population will show a 107% growth, from 113 million in 2016 and 179 million by 2026 respectively. Combined with growing health care costs, changes in the joint-family system and increased longevity- the average life expectancy of men is 75, and that of women is 79, at age 60- there is a pressing need for tangible alternative to the pension schemes, so that aged people can lived in a lifestyle they are accustomed to. Currently, the mandated coverage in govt and private pension schemes are available to around 11% of population. The rest of the population have to plan their financial security independently without recourse to any of the existing govt pension plans. Again, many of the senior citizens are living on fixed incomes, fixed pensions, or on the proceeds of investments that do not meet their financial needs. Some require additional sources of income to cover day to day expenses. This will not be taken care of by the pension schemes exist currently in the market. To address this issue of old-age financial solvency, it is necessary to first address the various instruments of saving that are available in the financial sector. Asset ownership structure in India suggests that housing wealth constitutes major portion of the non- pension wealth of the elderly. The problem that many house owners face is on how to tap into this housing wealth for consumption without selling the house and moving. The reverse mortgage is one such instrument that allows a house owner to borrow against the equity accumulated in the home without having to pay back the proceeds of such loan during the lifetime of the reverse mortgage. Old age comes with its own share of problems. As a person grows older, and his regular source of income dries up, his dependency on others can increase significantly. With health care expenses on the rise and little social security, living the golden years respectfully can be quite a challenge for senior citizens. In such a scenario, a regular Haranahalli Ramaswamy Institute of Higher Education, Hassan 1
  2. 2. Financial Freedom Through Reverse Mortgage income stream that can help them meet their financial needs and maintain their current living standards becomes important. One typical feature with most senior citizens is that their residential property accounts for a significant portion of their total asset pie. And, given its illiquid nature, property fails to aid senior citizens on the liquidity front. In the Union Budget 2007-08, a proposal to introduce 'Reverse Mortgages' was put forth. In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (equated monthly instalments), which comprise of both principal and interest amounts. The property is utilized as a security to cover the risk of default on the borrower's part. In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not have regular income, can mortgage the same with the lender (a scheduled bank or a housing finance company-HFC). In return, the lender makes periodic payment to the borrowers during their lifetime. In spite of mortgaging the house property, the borrower can continue to stay in it during his entire life span and continue to receive regular flows of income from the lender as well. Also, since the borrower doesn't have to service the loan, he need not bother about repaying the 'borrowed amount' to the lender. 1.2 Basis for Reverse Mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 2
  3. 3. Financial Freedom Through Reverse Mortgage Housing wealth is one of the non monetary wealth of senior citizens in India. Given its essential illiquid nature, it is not possible for elderly house owners to tap into home equity for financing day to day activity/expenses without either disposing off the property. Reverse mortgages were initially introduced in the USA, as a means of accessing equity locked up in residence, especially after the owner has retired. 1.3 Reverse mortgage- A tool to Financial Freedom A reverse mortgage is described as an annuity payment to the homeowner for the length of time that he/she remains in the house. No repayments have to be made on the loan as long as the homeowner is alive and still living in the house affected by the reverse mortgage, or till the spouse of the homeowner is alive and still living in the said property. This is better than conventional types of mortgage where the homeowner has to either move out or sell her property, or has to undertake to make regular annuity payments on a loan. A lot of elderly homeowners also want to “age in place” at a known surrounding and donor want to dispose-off the house property for various reasons both economic and psychological. For this category of people, a reverse mortgage is a potent tools to encash their housing equity to meet day to day living expenses. Reverse mortgage, as a product is currently present in USA, part of Europe and Australia, and New Zealand. The US experience has been mixed. While the market was stagnant for nearly half a decade, there is a huge growth both in terms of products sold in terms of the value of assets mortgaged this way since 2000. There were a lot of legislative changes that were required before the product could be introduced in the US. The Australian experience has also been similar. 1.4 Concept of Reverse mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 3
  4. 4. Financial Freedom Through Reverse Mortgage Most reverse mortgage lenders in USA require primary lien position. The security for the loan is the property itself; the loan is nonrecourse. If the borrower meets all the conditions of the loan, when the owner moves or dies, the owner or heir is responsible for repaying the loan obligation either through the sale of the property or other assets. If the loan obligation is less than the sale price, the owner or estate keeps whatever amount is left over. If the home is worth less than the amount due, the owner and heirs are not obligated for any shortfall. Reverse mortgage lenders can accelerate repayment at any time if the borrower defaults through failure to pay property taxes , failure to maintain a valid hazard insurance policy abandonment of the home, renting the home to someone else, or adding a new owner to the title. The various reverse mortgage products have similar structural features. When a home owner meets the appropriate qualification, there is the offer of a loan that can be taken as a lump sum, as an income stream, or as a line of credit, with various degrees of flexibility permitted between methods of borrowing. The income stream can be taken either for a fixed term, or as an annuity. The amount of money that can be borrowed depends on the age of the borrower, the value of the house, and some interest rate variables. 1.5 Legal aspects of reverse mortgage In Para No 89 of the Union Budget Speech 2007-08, Finance Minister proposed that 'National Housing Bank' (NHB) will shortly introduce a novel financial product for senior citizens: a 'reverse mortgage' under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house throughout his/ her lifetime, without repayment or servicing of loan. The NHB has come up with draft operational guidelines for the same to banks in March 2007. 1.6 Valuation of a reverse mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 4
  5. 5. Financial Freedom Through Reverse Mortgage In order to qualify for a reverse mortgage, the household head must be age 62 or above, and either own the home free and clear, or at least be able to pay off all remaining debt with the proceeds of the loan. There are additional requirements that are related to the condition of the property at the time of purchase. Once the household qualifies, an initial “principal limit factor” is set determining the maximum loan available to the borrower. As time passes, the limit factor grows according to a formula based on interest rates and certain ongoing insurance costs. The principal limit factor on a new loan is determined by a fixed function that depends only on the age of the youngest borrower, “adjusted property value” or maximum, claim amount, which is the minimum of the appraised value of the house less the maximum loan, and the “expected average mortgage interest rate”, premium over the risk free rate for mortgage products. No matter what the payment plan, the amount of the loan principal is based on the amount of equity in the house, expected appreciation in the property’s value, market interest rates, and the youngest borrower’s age and life expectancy. The larger the equity and greater the appreciation expected, the lower the risk that the loan principal and accrued interest will exceed the market value of the property when the loan becomes due. Higher interest rates mean more interest will accrue, increasing the risk that the loan obligation will exceed collateral value. The longer the owner lives, the greater the loan obligation whether the barrower chooses the annuity or lump sum with accrued interest option. 1.7 Risk factors in a reverse mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 5
  6. 6. Financial Freedom Through Reverse Mortgage Given the nature of the product, the long-term impact of interest rates and appreciation in real-estate prices, there are a lot of risk factors that are associated with a product like reverse mortgage. Risk factors in reverse mortgage for Lenders  Longevity  Interest rates and  Future property values The uncertainty of borrower longevity and tenure makes it difficult to estimate the timings of repayment and, therefore, the return the loan will yield. The more serious risk that the reverse mortgage provider bears concerns with the growth in the principal limit factor over a period of time. There is “crossover risk”, which is realized when the principal limit factor exceeds around 90 percent of the house value. From this point on, the lender is unable to recover the full amount owed. To avoid crossover risk, the loan amount must be set low enough to ensure the collateral will retain sufficient value to cover the lien as the property ages over this uncertain period. Longevity risk is a diversifiable risk that can be effectively managed through the pooling of a large numbers of loans. Then the lender or insurer can rely on mortality tables to estimate future loan terminations. Although one might expect an adverse selection problem, experience has shown that many borrowers are attracted to reverse mortgage program especially because they are ill. The moral hazards problems exists as the home owner has little financial incentive to make expenditures for improvements or maintenances that would help maintain the value of the property and may be physically unable to do so. Over time, the equity level is diluted there may be gradual decrease in the overall maintenance conducted by the home owners. This leads to gradual deterioration of the neighbourhood, resulting in lower rental values. Also, the secondary market for reverse mortgage houses does not exist. Moral hazard of the problem can compound this by introducing a ‘lemon’s problem where all the reverse Haranahalli Ramaswamy Institute of Higher Education, Hassan 6
  7. 7. Financial Freedom Through Reverse Mortgage mortgage houses have lower overall house values. Risk can act as a deterrent to suppliers of the product who wish to enter the market. For purposes of financial reporting, the lender records the outstanding dollars of the reverse mortgage as an asset. However, future payments to which the lender is committed are not shown on its financial statements, resulting in off-balance sheet liabilities. Both the interest and any shared appreciation component added to the loan balance are taxable as current income, even though the lender has not received any payments from the borrowers. Risk factors in reverse mortgage for home owners The risk faced by borrowers in reverse mortgage is also substantial. Borrowers don’t have the same capacity to diversify that lenders have. For a home owner, there is a trade-off between using housing wealth as a hedge against lump sums cash outflows such as medical expenses vs. using housing wealth to append to existing sources of income. The trade-off is important in the decision to go for reverse mortgage. Elderly homeowners put off the decision of reverse mortgage since there is no external motive, which force them to a decision. The risk faced by the borrowers on a reverse mortgage includes the ability to predict definitively their cash requirements at various times. The second important factor is the bequest motive. Elderly homeowner prefers to live their homes as a bequest to their heirs. This works as a social security for the family, especially in countries in the less-developed world. If the elderly home owner begins to draw down on their home-equity, there is incentive for heirs to provide for their needs, financially, or emotionally. The choice of drawing down on home equity can therefore reduce the social security available from the family. 1.8 Research Design  Statement of the problem Asset ownership structure in India suggests that housing wealth constitutes major portion of the non-pension wealth of the elderly. The problem that many house owners face is on Haranahalli Ramaswamy Institute of Higher Education, Hassan 7
  8. 8. Financial Freedom Through Reverse Mortgage how to tap into this housing wealth for consumption without selling the house and moving. The best way to tap into house wealth is Reverse Mortgage. Some preliminary analyses are also provided to document how a large segment of elderly citizens will benefit from such a program. The Study is focused on analyzing the process of reverse mortgage and its awareness level in the minds of senior citizens. And also to study the merits and demerits of reverse mortgage. To study the various issues like taxation, legal formalities of reverse mortgage.  Objective of the study The present study has been undertaken to meet the following specific objectives,  To study the awareness of reverse mortgage in the minds of senior citizens in Bangalore  To analyze Pros and cons of Reverse mortgage for senior citizens.  To study the reverse mortgage process  To find out the reason for it has been failed in initial stage in India  To study the various benefits/facilities available in Reverse mortgage to senior citizens in India.  To arrive at the reasonable conclusion by analyzing the process of reverse mortgage. Haranahalli Ramaswamy Institute of Higher Education, Hassan 8
  9. 9. Financial Freedom Through Reverse Mortgage  Scope of Study This project report analyses the potential for reverse mortgage products in India by identifying segments of the population that are most likely to utilise such a product. The characteristics that determines the segments are a. The lack of state-sponsored pension program and b. The ownership of defined type of house asset (with high home equity) on which the reverse mortgage can be availed. The study is aimed at establishing that a potential demand for reverse mortgage exists in India and it will increase liquity in the market. It would also increase the market efficiency by providing appropriate risk adjusted return on home property. Calculations from census of India 2001, and other related national and international sources are considered to show that over 10% of Indian workforce will be potential market for reverse mortgage.  Research Methodology This project is Descriptive as well as analytical in nature  Sampling Technique Population: Senior citizens in Bangalore city Sample Size: 100 Sampling type: Convenience Sampling Souses of data: Primary data from Questionnaire and secondary data from magazines, published Reports, journals ,websites, audio visual media etc.,  Tools for Data analysis Pie chart, Bar chart, Column chart by using Ms-Excel and SPSS software.  Method of Analysis: Haranahalli Ramaswamy Institute of Higher Education, Hassan 9
  10. 10. Financial Freedom Through Reverse Mortgage The primary data collected through structured questionnaire. The analysis of data is done by using percentages and pie charts and bar charts whenever it is required.  Limitations of the Study 1. The study covers only the awareness level of elder people on reverse mortgage. 2. The research covers the opinion of only the senior citizens of Bangalore. 3. Time is the main constraint in this project for collecting questionnaire samples. Only 100 samples are collected due to time limits which may not generalise the population.  Layout of Chapters 1. Introduction 2. Profile of Industry 3. Research methodology 4. Data analysis and interpretation 5. Findings ,suggestions and Conclusion Review of Literature Haranahalli Ramaswamy Institute of Higher Education, Hassan 10
  11. 11. Financial Freedom Through Reverse Mortgage About Reverse Mortgage  Reverse Mortgage is a mortgage loan for senior citizens who are not eligible for any form of mortgage loan.  Eligible borrower should be a senior citizen of India above 60 years of age.  The lender makes periodic payments (including lump sum payments) to the borrower i.e. the payment stream is “reversed”, as compared to a conventional mortgage.  Maximum period of the loan – 15 years.  The loan is not required to be serviced i.e. payment of instalment or interest, as long as the borrower is alive and in occupation of the property.  On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrower’s heir can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.  After adjusting the principal amount of the loan and accumulated interest, surplus, if any, will go to the estate of the deceased.  The borrower will also have the option of prepaying the loan at any time during the loan tenor or later (NHB has advised lenders not to levy any prepayment charge).  Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly, annual periodic cash advances or as a line of credit to be drawn in time of need or in lump sum.  Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the Primary Lending Institutions (PLI), subject to at least one of them being above 60 years of age. Haranahalli Ramaswamy Institute of Higher Education, Hassan 11
  12. 12. Financial Freedom Through Reverse Mortgage  The person should be the owner of a self-acquired, self occupied residential property (house or flat) located in India, with clear title indicating the prospective borrower’s ownership of the property. The residential property should be free from any encumbrances.  The residual life of the property should be at least 20 years.  The prospective borrowers should use that residential property as permanent primary residence. For the purpose of determining that the residential property is the permanent primary residence of the borrower, the PLIs may rely on documentary evidence, other sources supplemented by physical inspections.  With a Reverse Mortgage, the borrower remains the owner of the property. In the absence of social security, Reverse Mortgage Loan serves as a partial substitute for senior citizens. Reverse Mortgage in India The concept of reverse mortgage, although new in India, is very popular in countries like the United States. Recently, National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), released draft norms of reverse mortgage (the final guidelines are awaited). Following are some of the key features of the scheme from the draft norms. 1. Reverse Mortgage Loans (RMLs) are to be extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB. The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective borrowers are advised to consult PLIs regarding the detailed terms of Reverse Mortgage Loan as may be applicable to them. 2. Eligible Borrowers:  Should be Senior Citizen of India above 60 years of age.  Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the PLI, subject to at least one of them being above 60 years of age. PLIs may put in place suitable safeguards keeping into view the inherent longevity risk. Haranahalli Ramaswamy Institute of Higher Education, Hassan 12
  13. 13. Financial Freedom Through Reverse Mortgage  Should be the owner of a self- acquired, self occupied residential property (house or flat) located in India, with clear title indicating the prospective borrower's ownership of the propertssssssssy.  The residential property should be free from any encumbrances.  The residual life of the property should be at least 20 years.  The prospective borrowers should use that residential property as permanent primary residence. For the purpose of determining that the residential property is the permanent primary residence of the borrower, the PLIs may rely on documentary evidence, other sources supplemented by physical inspections. 3. Determination of Eligible Amount of Loan:  The amount of loan will depend on market value of residential property, as assessed by the PLI, age of borrower(s), and prevalent interest rate.  The table given hereunder may serve as an indicative guide for determining loan eligibility : T1: The table showing determination of loan as proportion of assessed value of property Age Loan as proportion of Assessed Value of Property 60 – 65 40% 66 – 70 50% 71 – 75 55% Above 75 60%  The above table is indicative and the PLIs will have the discretion to determine the eligible quantum of loan reckoning the ‘no negative equity guarantee' being provided by the PLI. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower.  The PLI may consider ensuring that the equity of the borrower in the residential property (Equity to Value Ratio - EVR) does not at any time during the tenor of the loan fall below 10%. Haranahalli Ramaswamy Institute of Higher Education, Hassan 13
  14. 14. Financial Freedom Through Reverse Mortgage  The PLIs will need to re-value the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state etc. Such revaluation may be done at least once every five years; the quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender. 4. Nature of Payment: Any or a combination of the following:  Periodic payments (monthly, quarterly, half-yearly, annual) to be decided mutually between the PLI and the borrower upfront  Lump-sum payments in one or more trenches  Committed Line of Credit, with an availability period agreed upon mutually, to be drawn down by the borrower Lump-sum payments may be made conditional and limited to special requirements such as medical exigencies, home improvement, maintenance, up-gradation, renovation, extension of residential property etc. The PLIs may be selective in considering lump-sum payments option and may frame their internal policy guidelines, particularly the eligibility and end-use criteria. However, these conditions shall be fully disclosed to potential borrowers upfront. It is important that nature of payments be decided in advance as part of the Reverse Mortgage Loan covenants. PLI at their discretion may consider providing for options to the borrower to change. 5. Eligible End use of funds The loan amount can be used for the following purposes:  Up gradation, renovation and extension of residential property.  For uses associated with home improvement, maintenance/insurance of residential property  Medical, emergency expenditure for maintenance of family Haranahalli Ramaswamy Institute of Higher Education, Hassan 14
  15. 15. Financial Freedom Through Reverse Mortgage  For supplementing pension/other income  Repayment of an existing loan taken for the residential property to be mortgaged  Meeting any other genuine need Use of Reverse Mortgage Loan for speculative, trading and business purposes shall not be permitted 6. Period of Loan: Maximum 15 years. 7. Interest Rate: The interest rate (including the periodic rest) to be charged on the Reverse Mortgage Loan to be extended to the borrower(s) may be fixed by PLI in the usual manner based on risk perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms and conditions in a transparent manner, upfront to the borrower. 8. Security:  The Reverse Mortgage Loan shall be secured by way of mortgage of residential property, in a suitable form, in favour of PLI.  Commercial property will not be eligible for Reverse Mortgage Loan. 9. Valuation of Residential Property:  The residential property should comply with the local residential land-use and building bye laws stipulated by local authorities, with duly approved lay-out and building plans.  The PLI shall determine the Market Value of the residential property through their external approved valuer(s). In-house professional valuers may also be used subject to adequate disclosure of the methodology.  The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLI, which in any case shall be at least once every five years. The methodology of the revaluation process and the frequency/schedule of such revaluations shall be clearly specified to the borrowers upfront. Haranahalli Ramaswamy Institute of Higher Education, Hassan 15
  16. 16. Financial Freedom Through Reverse Mortgage  PLIs are advised not to reckon expected future increase in property value in determining the amount of RML. Should the PLIs do so in their best commercial judgment, they may do so under a well defined Policy approved by their Board and based on professional advice regarding property prices. 10. Provision for Right to Rescission: As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, Senior Citizen borrowers may be given up to three business days to cancel the transaction, the “right of rescission,”. If the loan amount has been disbursed, the entire loan amount will need to be repaid by the Senior Citizen borrower within this three day period. However, interest for the period may be waived at the discretion of the PLI. 11. Loan Disbursement by Lender to Borrower:  The PLI will pay all loan proceeds directly to the borrower, except in cases pertaining to retirement of existing debt, payments to contractor(s) for the repairs of borrower's property, or payment of property taxes or hazard insurance premiums from the borrower's account set aside for the purpose.  In case the residential property is already mortgaged to any other institution, the PLI may, at its discretion, consider permitting use of part proceeds of RML to prepay/repay the existing housing loan. The loan amount will be paid directly to that institution to the extent of the loan outstanding with that institution with a view to release the mortgage.  Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly or annual periodic cash advances or as a line of credit to be drawn down in time of need or in lump sum.  The PLI will have the discretion to decide the mode of payment of the loan including fixation of loan tenor, depending on the state and market value of the property, age of the borrower and other factors. The rationale behind the decision of mode of payment and fixation of the loan tenor shall be clearly disclosed to the borrowers. Haranahalli Ramaswamy Institute of Higher Education, Hassan 16
  17. 17. Financial Freedom Through Reverse Mortgage 12. Closing: The PLIs will provide in writing, a fair and complete package of reverse mortgage loan material and specimen documents, covering inter-alia, the benefits and obligations of the product. They may also consider making available a tool kit to illustrate the potential effect of future house values, interest rates and the capitalization of interest on the loan. The closing costs may include the customary and reasonable fees and charges that may be collected by the PLIs from the borrower. The cost for any item charged to the borrower shall not normally exceed the cost paid by the lender or charged to the lender by the provider of such service(s). Such items may include:  Origination, Appraisal and Inspection Fees. The borrower may be charged pro- rata origination, appraisal and inspection fees by the PLI /appraiser.  Verification Charges of external firms  Title Examination Fees  Legal Charges/ Fees  Stamp Duty and Registration Charges  Property Survey and Valuation charges A detailed schedule of all such costs will clearly be specified and provided to the prospective borrowers upfront by the PLIs. 13. Settlement of Loan  The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or to relatives. Typically, a "permanent move" may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. PLIs may obtain such documentary evidence as may be deemed appropriate for the purpose. Haranahalli Ramaswamy Institute of Higher Education, Hassan 17
  18. 18. Financial Freedom Through Reverse Mortgage  Settlement of loan along with accumulated interest is to be met by the proceeds received out of Sale of Residential Property.  The borrower(s) or his/her/their estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.  A reasonable amount of time, say up to 2 months may be provided when Reverse Mortgage Loan repayment is triggered, for house to be sold.  The balance surplus (if any) remaining after settlement of the loan with accrued interest shall be passed on to the estate of the borrower. 14. Prepayment of Loan by Borrower(s)  The borrower(s) will have option to prepay the loan at any time during the loan tenor.  There will not be any prepayment levy/penalty/charge for such prepayments. 15. Loan Covenants:  The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence.  Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan products carry a clear and transparent ‘no negative equity' or ‘non-recourse' guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.  Loan Agreement: The PLIs shall enter into a detailed loan agreement setting out there in the salient features of the loan mortgage security and other terms and conditions, including disbursement and repayment of the loan, in addition to the usual provisions, which are ordinarily incorporated in a mortgage loan document.  The loan agreement may also include a provision that the borrower shall not make any testamentary disposition of the property to be mortgaged and even if it does so, it would be subject to the mortgage created in favour of the lending institution. In such a case, the borrower shall make a testamentary disposition of the mortgaged property in favour of any of his/her relatives, subject to the discharge of the mortgage debt by such legatee and a statement that the heirs shall not be Haranahalli Ramaswamy Institute of Higher Education, Hassan 18
  19. 19. Financial Freedom Through Reverse Mortgage entitled to challenge the validity of the mortgage as also the right of the mortgagee to enforce the mortgage in the event of death of the borrower unless the legal representative is willing to undertake the responsibility for discharging in full the amount of loan and accrued interest thereof.  In addition, the PLI may also consider obtaining a Registered Will from the borrower stating, inter-alia, that he/she has availed of Reverse Mortgage Loan from the PLI on security by way of mortgage of the residential property in favour of the PLI, meaning thereby that in the event of death of the borrower (and co- borrower, if any), the mortgagee is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s).  The PLIs may consider taking an undertaking from the prospective borrower that the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at the time of availment of Reverse Mortgage Loan facility as per which the property will vest in his/her spouse name after his/her demise. The borrower will also undertake not to make any other ‘Will' during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the PLI's favour by way of creation of mortgage on the immoveable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower's death.  The PLI will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities.  The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges and statutory payments.  The PLIs will ensure that borrower(s) are maintaining the residential property in good and saleable condition.  The PLI may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures.  The PLI reserves the right to inspect the residential property/premises or arrange to have the residential property/premises inspected by its representatives any time before the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of such inspections. Haranahalli Ramaswamy Institute of Higher Education, Hassan 19
  20. 20. Financial Freedom Through Reverse Mortgage 16. Title Indemnity/Insurance  The PLI shall obtain legal opinion for ensuring clarity on the title of the residential property.  The PLI shall also endeavour to obtain indemnity on title related risks, as and when such indemnity products are available in India. 17. Foreclosure: The loan shall be liable for foreclosure due to occurrence of the following events of default.  If the borrower has not stayed in the property for a continuous period of 1 year  If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.  If borrower(s) declare himself/herself/themselves bankrupt.  If the residential property so mortgaged to the PLI is donated or abandoned by the borrower(s).  If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house; adding a new owner to the house's title; changing the house's zoning classification; or creating further encumbrance on the property either by way taking out new debt against the residential property or alienating the interest by way of a gift or will.  Due to perpetration of fraud or misrepresentation by the borrower(s).  If the government under statutory provisions, seeks to acquiring the residential property for public use.  If the government condemns the residential property (for example, for health or safety reasons). Haranahalli Ramaswamy Institute of Higher Education, Hassan 20
  21. 21. Financial Freedom Through Reverse Mortgage 18. Option for PLI to Adjust Payments:  The PLI shall have the option to revise the periodic/lump-sum amount at such frequency or intervals based on revaluation of property, which in any case shall be at least once every five years.  Borrower shall be provided with an option to accept such revised terms and conditions for furtherance of the loan.  If the Borrower does not accept the revised terms, no further payments will be effected by the Lender. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The accumulated principal and interest shall become due and payable. 19. Counseling and Information to Borrowers:  The PLIs will observe and maintain high standards of conduct in dealing with the Senior Citizens and their families and treat them with special care.  The PLIs shall clearly and accurately disclose the terms of the Reverse Mortgage Loan without any ambiguity.  The PLIs should clearly explain to the prospective borrowers the terms and conditions of Reverse Mortgage Loan, the methodology followed for valuation of the residential property, the method of determination of eligible quantum of loan, the frequency of revaluation and review of terms and all related aspects of the Reverse Mortgage Loan.  The PLIs may suggest to the Senior Citizens to nominate their ‘personal representatives' usually a close relative who the PLI can contact in the event of any potentialities.  The PLIs may counsel the prospective borrowers about the possible impacts to the borrowers due to adverse movements in interest rates and property price fluctuations.  The PLIs shall clearly specify all the costs to the Borrower(s) that are associated with the transaction. Haranahalli Ramaswamy Institute of Higher Education, Hassan 21
  22. 22. Financial Freedom Through Reverse Mortgage  The PLIs shall in no way assert or imply to the borrower(s) that the borrower(s) is/ are obligated to purchase any other product or service offered by the PLI or any other associated institution in order to obtain a reverse mortgage loan.  Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reverse mortgage transaction.  Overall, the PLIs shall treat the Senior Citizen borrower fairly. As the old saying goes, “there are no free lunches in life”. In case of reverse mortgage, there exist a few guidelines, which may not 'appeal' to the house property owner i.e. the borrower. 1. As per the guidelines, the maximum loan tenure can be 15 years. So, if the borrower outlives the loan tenure, he can continue to stay in the house. However he will no longer be eligible for any payments from the bank/HFC. 2. The bank/HFC shall have the option to revise the periodic/lump sum amount at such frequency or intervals based on revaluation of property, or at least once every 5 years. The borrower will be provided the option to accept the revised terms and conditions to continue the loan. However, if he refuses to accept the revised terms and conditions, no further payments shall be made by the bank/HFC. Interest at the rate agreed before the review will continue to accrue on the outstanding loan amount. 3. Since the reverse mortgage can be either at fixed or floating rates, it will be prone to the interest rate movements. 4. Under the reverse mortgage, the legal heirs of the owner are not entitled to take control over the mortgaged property up to the extent of the outstanding loan. They are required to first repay the outstanding loan amount along with the interest to stake a claim on the property. 5. The banks/HFCs at their discretion may levy penalty or other charges on the prepayment of loan. So, if the borrower or his heirs wish to prepay the loan amount, they may have to bear an additional cost. Haranahalli Ramaswamy Institute of Higher Education, Hassan 22
  23. 23. Financial Freedom Through Reverse Mortgage The most important advantage offered by the reverse mortgage scheme is that despite mortgaging the house, the house owner retains its ownership, is entitled to live in the same throughout his lifetime and also has access to a regular income stream, which can help meet his day-to-day needs. From the banks/HFC's perspective, the mortgage on the property in its favor ensures that there is no scope for default. Individuals who wish to opt for the reverse mortgage scheme would do well to acquaint themselves with the nitty-gritty’s of the guidelines.  Affordable Housing for Older People by ‘Aged and community services’ in 2008: This report has highlighted a range of affordable housing issues as well as the growing importance of reverse mortgage in today’s world. As an individual we need to consider and determine how we address these issues and ensure we are providing the best care and services to the senior citizens. There are some possible actions we can take to begin addressing this issue.  Reverse mortgage loan scheme for the senior citizens of Delhi By Delhi research organization in 2009: The report covered that level of awareness of reverse mortgage in the minds of senior citizens of New Delhi and also covered the eligibility criteria to avail reverse mortgage service.  ‘Emergence of Reverse mortgage in India’ by Dewan corporation in 2009: The report covered the legal aspect and tax aspects of reverse mortgage.  Reverse Mortgage: Option for senior citizens by Kavita Sriram in 2009 (Times of India dated Oct 11 2009) The report covered the process of Reverse mortgage. Haranahalli Ramaswamy Institute of Higher Education, Hassan 23
  24. 24. Financial Freedom Through Reverse Mortgage  Reverse Mortgage: A failure in India?(Rediff.com dated March 03, 2008) This article says-The finance minister's budget proposals last year included the introduction of the reverse mortgage facility for senior citizens in India Recent reports seem to indicate that less than 150 people have taken advantage of the facility since its inception and it is, therefore, likely to be considered a failure. This is unfortunate because the facility simply has not been adequately explained. It was also unattractively packaged. The reverse mortgage facility allows senior citizens to unlock the value of their most valuable asset, their home, by mortgaging it and enjoying the use of the money in their lifetime while continuing to live in it until their deaths. It is a well-entrenched idea in many developed countries in the West where its terms are such that only home-owners above a given age (typically 60-65 years) may apply. The bank makes an evaluation of the current value of the home, decides the likely lifespan of the applicant home-owner (and his/her spouse), and, decides what percentage of the current value they are willing to loan them. The bank also fixes the interest rate it wishes to apply. Typically, the loan amount seldom is lower than 60-70 per cent of the market value of the property. The applicants have the option of taking the loan principal in a single lump-sum amount or by a fixed monthly amount instead. From time to time, the value of the property is re-visited by both parties. If the valuation has increased, the applicants are given the option of increasing the quantum of the loan, and should they do so, are given the incremental amount in lump-sum. If they have opted for the monthly payment scheme, this amount is appropriately increased. The principal plus interest charges accrue at the bank while the applicants live on in the home for the lengths of their lives - or until they decide to sell the home, whichever comes earlier. Haranahalli Ramaswamy Institute of Higher Education, Hassan 24
  25. 25. Financial Freedom Through Reverse Mortgage If they choose to sell it, they have to pay the bank all the accrued amounts. On the death of the second of the two spouses, the heirs to the property decide either to redeem the loan and keep the property, or sell the property and take the residual amount that may accrue from the sale after settling with the bank. Should the sale proceeds be lower than the accrued principal plus interest amount, the bank takes the loss. (This could happen if the real estate market has not moved up in the manner the bank had estimated originally. However experience of the past indicates that the banks seldom lose, as they factor this likelihood in setting the percentage of the current value they loan the applicants.) The Indian banking industry must not complicate the scheme as it has done. The industry's offer caps the available loan amount at Rs 50 lakh, instead of providing for an equitable percentage of the property's value, and limits the loan period to tenure of 15 years. It is possible that most Indians will not sell the family home, and would prefer passing it on to the next generation, even if they have to live in relative penury during their waning years because of the small income. However, many Indian traditions and values have changed in the last 15 years. This is like many other things. For example, we hated debt and dreaded living on borrowed funds. The Diners Club credit card was introduced in India in the 1960s. It never ever took off. But today's new generation has upturned that. More credit cards are issued in India per month than in most countries in the world, and cards have changed the way life is lived. The increasing GNP and the surge of the manufacturing and service sectors owe much to the great surge in consumer purchasing, including of expensive aspirational goods and real estate. The urge for a better life NOW is almost fundamental to the way the younger generation perceives its goals. Another example has to do with the tradition that parents moved in with one or the other of their children when they grew old. That too is changing. Work opportunities are moving young people away to new cities, even new countries, where their parents cannot or will not follow them. And even in the same cities, many "modern" parents prefer to live on their own. Haranahalli Ramaswamy Institute of Higher Education, Hassan 25
  26. 26. Financial Freedom Through Reverse Mortgage Further, in many cases, the children do not want to inherit the parents' home. Should they do so, they sell it anyway because they have moved on to bigger and better things. There are also old folk without children, and old folk out of luck with their children. In both cases, they are short of the cash to even pay essential bills. So while the reverse mortgage idea may not take off in India as it has in the West, where social and parent-child behaviour usually dictates that the old folk live off their very last penny before they die, there are sufficient demographic and psychographic data to indicate that in India there are takers in the millions who, for one reason or another, are likely candidates for the reverse mortgage idea. In any event, the proposal should be given the opportunity to fail for the right reasons. And that means it should be packaged and marketed in a way that makes sense to the likely customer. Haranahalli Ramaswamy Institute of Higher Education, Hassan 26
  27. 27. Financial Freedom Through Reverse Mortgage Profile of the Industry 3.1 Introduction: Banking sector The Indian Banking industry governed by the Banking Regulation Act of India, 1949, falling into two broad classifications, non-scheduled banks and scheduled banks. Within the commercial banks there are nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks. With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front. Retail lending (especially mortgage financing) has been grabbing a major share of the market in the last 3 years. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks have also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. RBI's soft interest rate policy has helped increase the liquidity in the market, and banks have been liquidating their gilt portfolios partially to free resources for lending. Credit off take is expected to be reasonably good both on retail and corporate sides. Following the advice of the government banks have increased lending to agricultural sector, while ensuring good quality lending by informed customer analysis. Currently the banking sector in the country is strongly fragmented and hence with further policy changes taking place in the sector, consolidation is likely to take place at a faster rate. However this is subject to the removal of the ceiling on voting rights will ensure that private sector and foreign banks will be in a much better position to carry out acquisitions Haranahalli Ramaswamy Institute of Higher Education, Hassan 27
  28. 28. Financial Freedom Through Reverse Mortgage in the banking sector. A hike in FDI capital limits in the sector would further go a long way in the process of consolidation. In terms of credit growth, going forward, India's core sector is witnessing a revival of sorts. The manufacturing sector has shown significant improvement in FY05. Hence as corporate growth picks up lending too is likely to see an uptick. Retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years. Indian banks have to be encouraged to expand fast, both through organic growth and through consolidation, in order to fuel the growth of large firms and to strengthen their risk assessment systems, for catering to the requirements of smaller firms. Various policy measures are in process to help this transition along. However, when we look at the global scenario, only 22 Indian banks figure in the list of top 1000 banks and there are only 5 Indian banks in the list of top 500 banks. The biggest Indian bank, State Bank of India, has a market capitalization of under US$ 10 billion compared to the market capitalization of US$ 243 billion of Citigroup. Indian banking sector has a long way to go before we can say that Indian banks are relatively significant players. Having said that, there are sufficient reasons to believe that the Indian Banking sector is poised for tremendous growth and with proper policy framework in place, it would be very soon, matching their global counterparts on most of the relevant banking indicators/ parameters (except size for some time to come). 3.2 Indian Banking System: Haranahalli Ramaswamy Institute of Higher Education, Hassan 28
  29. 29. Financial Freedom Through Reverse Mortgage For the past three decades India's banking system has several outstanding achievements to its credit. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:  Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.  New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. Phase I During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. Phase II The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:  1949: Enactment of Banking Regulation Act.  1955: Nationalisation of State Bank of India.  1959: Nationalisation of SBI subsidiaries.  1961: Insurance cover extended to deposits.  1969: Nationalisation of 14 major banks.  1971: Creation of credit guarantee corporation.  1975: Creation of regional rural banks. Haranahalli Ramaswamy Institute of Higher Education, Hassan 29
  30. 30. Financial Freedom Through Reverse Mortgage  1980: Nationalisation of seven banks with deposits over 200 crores. Phase III In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. 3.3 Current Scenario: The Indian Banking industry has been undergoing rapid changes reflecting a number of underlying changes. Liberalization and deregulation witnessed in the Indian markets in the 1990s have resulted in a spurt in banking activity in India. Significant advances in communication have enabled banks to expand their reach, both in terms of geography covered as well as new products introduced. With increased competition in wholesale banking due to the entry of foreign banks and new private sector banks, the sector has witnessed a squeeze in margins. This has led to banks increasing their focus on retail banking so as to obtain access to low cost funds and to expand into relatively untapped, potential growth areas. Banks and financial institutions are thus continuously exploring new avenues for increasing their footprint and safeguarding their margins. Competition from multinational banks and entry of new private sector banks has rewritten the rules of the retail lending business in India. Slow growth in corporate lending, pressure on corporate spreads due to competition and concerns over asset quality have induced public sector banks to follow the private sector banks in placing emphasis on growth through expansion of retail portfolio. Haranahalli Ramaswamy Institute of Higher Education, Hassan 30
  31. 31. Financial Freedom Through Reverse Mortgage Different reverse mortgage offerings in India 3.4 State Bank of India The State Bank of India (SBI) started offering reverse mortgage products for senior citizen on October 12, 2007. Joint loans are given if the spouse is alive and is over 58 years of age. The loan is offered by all branches of SBI from October 12, 2007. The loan is offered at an interest rate of 10.75% pa and is subject to change at the end of every five years along with revaluation of security. Every five years, bank may even re-adjust the loan installments, if it is needed, depending on market conditions and loan status. The Chief General Manager for Personal Banking (SBI), Mr. Sangeet Shukla told that there is no upper limit of amount of loan. Also, the maximum period for availing this benefit is 15 years. Under this loan, borrowers can be avail payment against the security of their houses on monthly or quarter installments or either he/she can go for as a lump sum payment at the beginning. During their lifetime, the borrower does not have to pay the loan and will continue to stay in their house. Thereafter, either the legal heirs can repay the loan and redeem the property but if this option is not exercised, bank will sell the property and liquidate the loan. Surplus, if any, will be passed on to the legal heirs. T2: Table showing details of SBI Reverse Mortgage Loan No. Parameter Details (1) Objective of the To provide a source of additional income for senior citizens of scheme India who own self-acquired and self-occupied house property in India. Haranahalli Ramaswamy Institute of Higher Education, Hassan 31
  32. 32. Financial Freedom Through Reverse Mortgage (2) Eligibility a. No. of borrowers Single or jointly with spouse in case of a living spouse. b. Age of first Above 60 years borrower c. No. of surviving Should not be more than one. Borrowers will have to give an spouses on the date undertaking that they will not remarry during the currency of of sanction of loan the loan. If the borrowers choose to remarry, the loan will be foreclosed. d. Age of spouse Above 58 years e. Residence  Borrower should be staying at self-acquired and self owned house /flat against which loan is being raised, as his permanent primary residence.  Mobile/Telephone/Credit Card bills/ Certificate from the Housing Society where the borrower is staying / Affidavit made before the Executive Magistrate may be accepted as proof of residence.  Borrowers will be required to inform the Bank when they cease to use this residence as their permanent residence. f. Title of the Property  Borrowers should have a clear and transferable title in their names.  Title verification and search report for a period of 30 years will be required to be obtained from the Bank’s empanelled advocate at borrowers’ cost. g. Title of the property Case– Title in single name and loan availed jointly with and number of spouse. borrowers. Title holder should make a Will in favour of the other spouse. The Will should confirm that this is the last Will and that it super cedes all earlier Wills, if any. The borrower to undertake that no fresh Will shall be made during the currency of the loan. Haranahalli Ramaswamy Institute of Higher Education, Hassan 32
  33. 33. Financial Freedom Through Reverse Mortgage (3) Security The RML shall be secured by way of equitable mortgage of residential property. (4) Tenor Age of the younger of the borrowers between 58 and up to 68 years:15 years Age of the younger of the borrowers above 68years:10 years OR till death of the borrower(s), whichever is earlier. (5) Disbursement By credit to an SB account in the joint names of the borrowers operated by E or S. (6) Periodicity of availing 1.Monthly / quarterly payments loan 2.Lumpsum payment (7) Quantum of loan The loan amount would be 90% of the value of property. Loan amount would include interest till maturity. The loan instalments payable to the borrower(s) would be as under for a loan amount of Rs.1 lac (at interest rate of 10.75% p.a.): Loan Tenor (years) 10 15 Monthly instalments (Rs.) 468 225 Quarterly instalments (Rs.) 1,423 687 Lump sum payment (Rs.) 36,022 21,619 The maximum loan amount is kept at Rs.1 Crores (monthly payment Rs.22,500/- for 15 years) and minimum Rs.3 lacs (monthly payment Rs.675/- for 15 years). Example of arriving at the monthly instalments: Property value:Rs.10 lacs Qualifying loan amount (90% of property value):Rs.9 lacs Haranahalli Ramaswamy Institute of Higher Education, Hassan 33
  34. 34. Financial Freedom Through Reverse Mortgage Tenure:15 years Monthly instalment: Rs. 225 x 9 = Rs.2,025/- (8) Purpose of Loan Supplementing income, any personal expenses, house repairs, etc. Loan amount should not be used for speculative, trading and business purposes. (9) Repayment/Settlement  The loan shall become due and payable only when the last surviving borrower dies or opts to sell the home, or permanently moves out of the home for to an institution or to relatives. Typically, a "permanent move" may generally mean that neither the borrower nor any other co-borrower has lived in the house continuously for one year or do not intend to live continuously. Bank may obtain such documentary evidence as may be deemed appropriate for the purpose.  Settlement of loan along with accumulated interest is to be met by the proceeds received out of sale of residential property or prepayment by borrowers and his next of kin.  The borrower(s) or his/her/their legal heirs / estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.  A reasonable amount of time, say up to 6 months, may be provided when RML repayment is triggered, for house to be sold.  The balance surplus (if any), remaining after settlement of the loan with accrued interest and expenses, shall be passed on to the borrower or the estate of the borrower/legal heirs.  Borrowers will be required to submit annual life Haranahalli Ramaswamy Institute of Higher Education, Hassan 34
  35. 35. Financial Freedom Through Reverse Mortgage certificates in the month of November every year. This certificate will also include clauses regarding marital status, and permanent residence of the borrowers, in addition to the balance confirmation as on 31st October of that year.  List of legal heirs will be obtained at the time of sanction of loan. With a view to avoiding disputes at the time of settlement of loan amount by legal heirs, specific instructions about inheritance of the property and payment of balance amount, if any, of the sale proceeds after settling the Bank’s dues, will be required to be part of the borrowers’ Will. (10) Foreclosure  The loan shall be liable for foreclosure due to occurrence of the following events of default.  If the borrower(s) has/have not stayed in the property for a continuous period of one year  If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the Bank reserves the right to insist on repayment of loan by bringing the Residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.  If borrower(s) declare himself/herself/themselves bankrupt.  If the residential property so mortgaged to the Bank is donated or abandoned by the borrower(s).  If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house by creating a tenancy right; adding a new owner to the house's title; changing the house's zoning Haranahalli Ramaswamy Institute of Higher Education, Hassan 35
  36. 36. Financial Freedom Through Reverse Mortgage classification; or creating further encumbrance on the property either by way of taking out new debt against the residential property or alienating the interest by way of gift or will.  Due to perpetration of fraud or misrepresentation by the borrower(s).  If the government under statutory provisions, seeks to acquire the residential property for public use.  If the government condemns the residential property (for example, for health or safety reasons).  Any other event such as re-marriage of the borrower(s) etc which shall have an adverse impact on the loan settlement prospects.  Borrowers do not accept the revised terms on revaluation of property and interest reset at the end of every 5 years from sanction.  Any violation of the terms and conditions of RML. (11) Pre-payment of loan  The borrower(s) will have option to prepay the loan at any time during the loan tenor.  There will be no prepayment penalty. (12) Valuation/Revaluation  After the initial valuation to determine the loan of property and option amount, subsequent revaluations will be done at for the Bank to adjust intervals of 5 years. payments.  The Bank shall have the option to revise the periodic/lump-sum amount every 5 years along with revaluation. In the scenario of fall in property prices, the Bank may decide to revise the amount at any time earlier than 5 years. At every stage of revision, it should be ensured that the Loan to Value ratio does not Haranahalli Ramaswamy Institute of Higher Education, Hassan 36
  37. 37. Financial Freedom Through Reverse Mortgage exceed 90% at maturity.  If the Borrower does not accept the revised terms, no further payments will be affected by the Bank. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The accumulated principal and interest shall become due and payable as mentioned in clauses 9 and 10. (13) Interest Rate 10.75% p.a. (Fixed) subject to reset every 5 years. (14) Processing fee 0.50% of the loan amount, minimum Rs.500/- and maximum of Rs.10,000/- (15) Right of Rescission As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, borrowers will have right of rescission up to seven days to cancel the transaction. If the loan amount has been disbursed, the entire loan amount will need to be repaid by the borrower within this period. However, interest for the period may be waived. Processing fee shall not be refunded in such cases. (16) Insurance and  The house property will be insured by the borrower at maintenance of house his cost against fire, earthquake and other calamities. property  The borrower shall ensure to pay all taxes, charges etc.  Bank reserves the right to pay insurance premium, taxes, charges etc. by reducing the loan amount to that extent.  The borrower shall maintain the property in good condition. Haranahalli Ramaswamy Institute of Higher Education, Hassan 37
  38. 38. Financial Freedom Through Reverse Mortgage (17) Operational issues: a. Type of facility Non-renewable Overdraft without ledger folio charges. No cheque book / debit card will be linked to this account. b. Availability of All branches. product 3.5 REVERSE MORTGAGE LOAN – “PNB BAGHBAN’ FOR SENIOR CITIZENS PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based product for senior citizen titled "PNB Baghban". The product addresses one of the very important requirements of the society in the fast changing culture of Indian society. The salient features of the product are given hereunder: Objective To address the financial needs of senior citizens owning self occupied property (house), for leading a decent life. Eligibility The residential house/flat owner, who is resident of India, of the age of 60 years& above, is eligible to raise the loan under this Scheme. Qualifying/Maximum Amount of Loan/Margin 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, along with interest, shall be restricted to Rs.100 lac. Rate of Interest 10% p.a. (fixed) subject to re-set clause of five years (as applicable for Housing Loan Borrowers) Haranahalli Ramaswamy Institute of Higher Education, Hassan 38
  39. 39. Financial Freedom Through Reverse Mortgage Disbursement/tenor of loan The loan shall be extended as regular fixed monthly payments during the loan period. I.e. 10-20 years or till the death of the last surviving spouse, whichever is earlier. Depending on the age of the beneficiary a chart containing the amount of monthly instalments ( calculated on ‘Reverse Annuity Mortgage” basis) to be paid to the senior citizen borrower for different tenors of loan per lac of rupees is as under :- T3: Table showing Qualifying Loan Amount (Rs.1.00 lac) Tenor (yrs.) 10 11 12 13 14 15 16 17 18 19 20 Monthly Instalment(Rs.) 490 420 360 315 275 240 215 190 170 150 135 Security The loan shall be secured by way of equitable Mortgage of self acquired / self occupied Residential Property in favor of the Bank. The property to be revalued every 5 years and monthly loan installment to be re fixed keeping in view applicable ROI and valuation of property. Repayment of Loan Settlement of loan, along with accumulated interest, to be met by the proceeds received out of sale of residential property and any surplus to be paid to heirs. The loan will, as such, become due for recovery and payable six months after death of the last surviving spouse. However the legal heirs/legatee of the deceased borrowers will be given first option to settle the loan, along with the accumulated interest, without sale of the property. Upfront fee/Documentation Charges Upfront fee – Amount equivalent to half+ month’s loan instalment subject to Maximum of Rs.15, 000/-. Documentation Charges/Inspection Charges - Nil Haranahalli Ramaswamy Institute of Higher Education, Hassan 39
  40. 40. Financial Freedom Through Reverse Mortgage Right of Rescission After the loan is sanctioned senior citizen borrower(s) shall be given up to 10 days time to relook into his requirements and if he so wishes to cancel the transaction for any reason whatsoever. 3.6 Reverse Mortgage by DHFL India's second-largest private housing finance company, Dewan Housing Finance Corporation Limited (DHFL), is the first off the block In India with a reverse mortgage scheme. The scheme, called 'Saksham' is targeted at retired senior citizens above 60 years of age. The scheme is similar to a housing loan except that in a home loan the borrower pays a fixed EMI to the lending institution, while in reverse mortgage the lender pays the borrower a fixed sum of money on a monthly (or quarterly) basis, the total payment being equal to the value of the property and the interest on the loaned amount. After the death of the borrower and the borrower's spouse, the housing company sells the property to recover the amount paid out along with interest at a rate similar to interest on housing loans. The scheme is designed to supplement the monthly income of senior citizens. This scheme is offered to retired people above the age of 60 years who own property and have been living in it for at least one year. The loan amount is sanctioned based on the:  Age of the borrower  Average value of the property  Rate of interest on the loan  The payment method chosen by the borrower Haranahalli Ramaswamy Institute of Higher Education, Hassan 40
  41. 41. Financial Freedom Through Reverse Mortgage The eligibility for a reverse mortgage loan is simple. The borrower should be 60 years of age, living in self-owned property, which is free of any other encumbrances, and is an approved construction. The amount loaned would depend on the estimated value of the property (minus the interest cost) its condition and life. The loan does not apply to ancestral property. Saksham allows customers and their spouses to live in the property as long as they are alive, without the fear of eviction even after the tenure expires. The surplus amount is then paid to the legal heirs of the borrower. The legal heirs also have the option to re- possess the property after the demise of both customers and their spouses. According to Shivkumar Mani, head, marketing, DHFL, "As per the guidelines laid down by NHB, DHFL is the first company to launch this scheme in India. This unique scheme is designed to help senior citizens to sustain their lifestyle and also help them maintain their monthly expenditure without being dependent on anyone. It is a social security scheme designed to benefit the senior citizens post retirement." DHFL will first launch Saksham in Mumbai and its adjoining areas before making it available nationally. Haranahalli Ramaswamy Institute of Higher Education, Hassan 41
  42. 42. Financial Freedom Through Reverse Mortgage 3.7 Reverse Mortgage by Union Bank Union Bank of India on 4 April, 2008 launched its "Union Reverse Mortgage Scheme", a loan product designed exclusively for the benefit of senior citizens. The bank is the fourth in the country to launch the scheme through which the loan seeker need not worry about re-payment and be assured of monthly income; the Bank's Bangalore Zone Field General Manager LNVRao. The loan will be available to homeowners who are 60 years of age or more and can be availed jointly with the spouse, provided he or she is more than 55 years old. Unlike other loan products, there are no income criteria to be met for availing loan. On the demise of the last surviving owner, the legal heirs have the right to repay. If they do not wish to do so, the bank will sell the property, set off the loan outstanding the surplus, if any, will be given to legal heirs. The minimum loan amount that can be availed is Rs one lac and maximum Rs 50 lac. Seventy per cent of the assessed value of the building would be the loan amount. The maximum tenor of a loan under this scheme is 15 years. The loan carries a fixed interest of 10 per cent per annum. Typically, for a loan of Rs 10 lac, the monthly pay off to the owner on ten year loan will be Rs 4880 and on a 15 year loan, it will be Rs 2410. The property is revalued every five years and adjustments will be made to the monthly payments accordingly. The borrower has to comply with certain conditions which include that he bears the cost of property insured against fire, earthquake and other calamities. If the borrower ceases to stay in the house which has been mortgaged, the loan will be cancelled. Haranahalli Ramaswamy Institute of Higher Education, Hassan 42
  43. 43. Financial Freedom Through Reverse Mortgage 3.8 LIC Housing to combine reverse mortgage with insurance plan LIC Housing Finance is looking to combine its reverse mortgage plan with a whole-life annuity provided by a life insurer. This will allow home owners to use their property to generate income for life as against for only 15 years as provided under the present reverse mortgage schemes. The housing finance arm of the Life Insurance Corporation on Thursday announced the launch of its reverse mortgage scheme. This product is available across the country for senior citizens above 60 years. The loan can be availed of either singly or jointly with a spouse, if the spouse is also above 60. The shortcoming of most reverse mortgage schemes is that it is available only for 15 years. With the increased life expectancy, most borrowers are expected to outlive the term of their reverse mortgage. Under present schemes while income from the reverse mortgage dries up after 15 years, the borrowers end up with the lender having a lien on their property. LIC Housing Finance chief executive SK Mitter told ET that the company was in talks with insurance companies to work out a scheme where home equity could be used to buy an annuity that provides income for the entire life span of the borrower. The reverse mortgage loan by LICHF will be offered at a fixed interest rate, subject to reset every five years. Under the scheme, senior citizens can avail of the loan either on a monthly payment or on a lump sum payment or a combination of both. The property evaluated for the loan should have at least 20 years of residual life. The maximum loan balance shall be 90% of the value of the property and the loan balance will include interest till maturity. The amount of the loan will take into consideration the property value, age of the borrower, and the rate of interest. The loan will become due and payable only when the last surviving borrower dies or opts to sell the home, or permanently moves out of the home. Haranahalli Ramaswamy Institute of Higher Education, Hassan 43
  44. 44. Financial Freedom Through Reverse Mortgage Data Analysis and Interpretation Profile of the Respondents 4.1 Age of the Respondents: The survey is done for all age groups. But 32% respondents are the age group of 60-65. The eligible age group for reverse mortgage is above 60. T4: The Table showing Number of respondents in different age group. Age Respondents < 50 10 50-60 26 60-65 32 65-70 26 > 70 6 C1: The chart showing number of respondents for age group Haranahalli Ramaswamy Institute of Higher Education, Hassan 44
  45. 45. Financial Freedom Through Reverse Mortgage Analysis: The research is done by choosing the age group above 40 years. The distribution of age is in between 40 to 90. Among surveyed population, 32% of people are between 60-65 age groups. And 64% people are above 60 years of age. According to a survey report, In India, statistics show that number of elderly as a proportion of population will show a 107% growth, from 113 million in 2016 and 179 million by 2026 respectively. Interpretation: This implies the target population will increase in the near future. And India will get elderly educated people by another 10 years. 4.2 Gender of Respondents: T5: The Table showing Gender of respondents Gender Respondents Male 63 Female 37 C2: The Chart showing Gender of respondents Haranahalli Ramaswamy Institute of Higher Education, Hassan 45
  46. 46. Financial Freedom Through Reverse Mortgage Gender and Age group T6: The table showing Gender to age group of respondents Gender / Age < 50 50-60 60-65 65-70 >70 group Male 7 13 23 15 5 Female 3 13 9 11 1 C3: The chart showing Gender to age group of respondents 4.3 Qualification of Respondents: Haranahalli Ramaswamy Institute of Higher Education, Hassan 46
  47. 47. Financial Freedom Through Reverse Mortgage T7: The table showing Qualification of Respondents Qualification Respondents Uneducated 7 Less than PUC 14 Graduate 34 P.G. 25 Professional courses 12 Others 8 C4: The chart showing Qualification of respondents Analysis: As the data indicates, more than 75% of the respondents are well educated. Their qualifications are above graduation level. Interpretation: This show, the education level of Bangalore’s elder people is good. This helps to make them aware of Reverse mortgage 4.4 Number of Dependents in the Family: T8: The table showing Dependent in family of respondents Number Dependents Respondents Haranahalli Ramaswamy Institute of Higher Education, Hassan 47
  48. 48. Financial Freedom Through Reverse Mortgage 0 0 1-2 33 2-4 25 4-6 18 6-8 12 >8 12 C5: The chart showing Dependent in family of respondents Analysis and Interpretation The survey shows that, the elderly people are having the dependents one or the other way. According to the survey, 43% of people have 1 or 2 dependents in the family. 4.5 Gender and Dependents C6: The chart showing Dependent in family of respondents to gender Haranahalli Ramaswamy Institute of Higher Education, Hassan 48
  49. 49. Financial Freedom Through Reverse Mortgage Analysis: From the graph, it is clear that about 43% people are having 1 or 2 dependents in their family. The first dependent always will be their spouse. Interpretation: This implies, an elder person is having at least 1 dependent in the family. Especially in the countries like India, they will be more sentimental towards their dependents. 4.6 Present Status: T9: The table showing working status of respondents Retired 65 Not Retired 35 Haranahalli Ramaswamy Institute of Higher Education, Hassan 49
  50. 50. Financial Freedom Through Reverse Mortgage 4.7 Occupation: T10: The table showing occupation of respondents Occupation Respondents Business 12 Govt Employee 20 Pvt. Company Employee 13 Self-employed 5 Profession 15 House wife 16 Unemployed 4 Retired 10 Others 5 4.8 Income per annum: T11: Table showing Income level of Respondents Income per annum Respondents Below 2,40,000 45 2,40,001 – 5,00,000 27 5,00,001– 10,00,000 18 10,00,001 and above 10 C7: Chart showing Income distribution of respondents Haranahalli Ramaswamy Institute of Higher Education, Hassan 50
  51. 51. Financial Freedom Through Reverse Mortgage Analysis: From the graph, about 45% people are below 2,40,000 income per annum. And 27% people have 2,40,000 to 5,00,000 income per annum. Combing both, the majority are below 5,00,000 income group. Interpretation: This implies the income level of elderly is evenly distributed. Which would be your preferred investment instrument? T12: The table showing investment preferences on respondents Instrument Responses Bank deposits 62 Insurance 52 Mutual funds 25 Stock market 20 Others 5 Analysis: Haranahalli Ramaswamy Institute of Higher Education, Hassan 51
  52. 52. Financial Freedom Through Reverse Mortgage Majority of the aged people want to invest in either Bank deposits or Insurance because of Security on their investments. Interpretation: This shows, aged people are risk averse persons. They do not want to take high risk. As reverse mortgage has low risk, this financial service will be widely accepted. 4.9 Do you own House/Houses? T13: The table showing number of respondents having at least one house Options Responses Yes 79 No 21 C8: The chart showing number of respondents having at least one house Haranahalli Ramaswamy Institute of Higher Education, Hassan 52
  53. 53. Financial Freedom Through Reverse Mortgage Analysis: About 84% people have their own house. Among them most of them are having more than one houses. This shows most of the elderly people are house owner. Interpretation: As the target clients for reverse mortgage are elderly house owners, this data clearly give the idea that reverse mortgage has potential market in India. 4.10 Are you using Reverse Mortgage facility? T14: The table showing users and non-users of Reverse mortgage Options Responses Yes 6 No 94 C9: The chart showing users and non-users of Reverse mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 53
  54. 54. Financial Freedom Through Reverse Mortgage Analysis: Out of 100, around 94 people are not using Reverse mortgage product. Only 6 people are using the service from various institutions like Dewan Corporation, State Bank of India, Punjab national bank, Canara bank. Interpretation: This chart shows that, the reverse mortgage market is an untapped area. There is a huge opportunity for financial institutional to offer this service. 4.11 Are you aware of the fact that, Reverse Mortgage gives the Financial support in your Second Innings of life? T15: The table showing awareness level on Reverse Mortgage Options Responses Yes 34 No 66 C10: The chart showing awareness level on Reverse Mortgage Haranahalli Ramaswamy Institute of Higher Education, Hassan 54
  55. 55. Financial Freedom Through Reverse Mortgage Analysis: The data clearly indicates, only 34 members are aware of reverse mortgage service. Majority of them are unaware of the services. Among 34 members, only 6 members are using the service. Interpretation: From this, we can interpret that the elderly people are not much aware of reverse mortgage service. If the financial institutions make them aware, the elderly can avail the service. 4.12 Do you think financial advice is needed in the old age? C11: The chart showing financial advice requirement Haranahalli Ramaswamy Institute of Higher Education, Hassan 55
  56. 56. Financial Freedom Through Reverse Mortgage Analysis: About 88% people feel there is a need of financial advice at their old age. Interpretation: Financial advice should be given to the elder people at their old age about the various services which helps them. 4.13 Parents spend money on their children; think it as an Investment for future: T16:The table showing responses Strongly Agree 35 Agree 25 Haranahalli Ramaswamy Institute of Higher Education, Hassan 56

×