Reverse Mortgages


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Presentation on Reverse Mortgages prepared as part of Commercial Banking Course

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Reverse Mortgages

  1. 1. Presented by Group 4 Ashwin Iyer Hardik Doshi Kunal Kumar Madhura Phadke Vikas Jain
  2. 2. Background Senior citizens – a significant constituent of the Indian population. Increasing dependency and helplessness Cost of medicine and healthcare facilities increasing Senior citizens need a regular stream of cash flows to address their financial needs Own home is the only asset that they have.
  3. 3. Background Due to increasing property prices, houses provide a significant amount of “equity” to the owners. Reverse mortgage is a process which facilitates capitalizing on the owned home and providing regular income.
  4. 4. What is it? A special type of loan opportunity available to the senior citizens Used to convert part of the home equity into tax free income. No need to give up the home, or even surrender the title. The home is mortgaged to the lender and the borrower receives regular principal payments. The payments can be in the following modes: Monthly / Quarterly Lump sum Line of credit
  5. 5. Comparison Conventional mortgage Reverse mortgage The lender receives The lender makes regular payments regular payments At the end of the term, At the end of the term the property is (or the death of the transferred to the buyer. borrower), the property Falling debt, rising is sold and the loan is equity repaid from the The cost to the borrower proceeds. is relatively lower. Rising Debt, Falling Equity The cost to the borrower is higher
  7. 7. Strengths The aged home owners get a steady and regular stream of cash flows. There are no income criteria. The borrower does not need to make any repayments during the lifetime of the loan. The spouse continues to get the loan for a period of 15 years in case of death of the borrower. The cash inflows from a reverse mortgage are not treated as income, but rather as a loan. Hence no tax is levied on the same.
  8. 8. Strengths The house can be occupied by the borrower and the spouse till the both die. In case the value of the asset exceeds the loan amount, then the heirs are entitled to the surplus. Prepayment of loan is allowed. National housing bank guarantees payment to the senior citizens by the banks and financial institutions. If the value of the property increases beyond a certain point, the borrower can avail of another facility from the lender on the same property.
  9. 9. Weaknesses There is a ceiling on the maximum tenor of the loan – 15 years. The payments will stop in case the borrower outlives this time period. The borrower needs to have a clear title in his name to avail of this loan. The banks / financial institutions charge various fees to the borrower, which make the loan expensive.
  10. 10. Opportunities This scheme provides social security to the senior citizens. As discussed earlier, as longevity is increasing, so are medical and healthcare costs. Thus, aged people do require a steady source of income. As most of the people have a strong preference for their own home, there are many people who might opt for this scheme. The banks can adopt a floating rate of interest with a ceiling, beyond which the rate cannot exceed.
  11. 11. Threats If proper rules and guidelines are not put into place, the property valuations could become ambiguous. In case the value of the assets falls below the loan amount, the lender can force the borrower out of the house. Since the rate of interest is not regulated, the lenders fix the rate at their discretion. In case of floating rate of interest, the burden on the borrower will increase. Lack of insurance – if the property is not insured for damage / devaluation, the bank will lose out on the value.
  12. 12. The Industry Worldwide In just five months (January through May 2007), the reverse mortgage business has witnessed a rapid evolution not seen in over 17 years of existence (in the US) The potential of the reverse mortgage industry in the US is $4.3 Trillion (the value of the houses owned by people of age more than 62). This could double to $10 Trillion in ten years. - DHFL introduced India’s first reverse mortgage in 2006. Now this facility is also available with Punjab National Bank and State Bank of India. Bank of Baroda is planning to launch one soon.
  13. 13. The Industry Worldwide Though the Indian market potential would not be as huge as in the US, but with real estate prices increasing, this is all set to be one of the more attractive industries within the finance sector
  14. 14. The Indian Scene The first scheme was PNB Baghban launched by Punjab National Bank in April 2007. The number of senior citizens in India – 80 million. The current market size is 3 million households worth $39 billion, which is expected to reach $113 billion and 6 million households by 2015 However, till now only around 150 senior citizens have availed of this facility. Most of the Indians are not comfortable with the idea of mortgaging their own property.
  15. 15. Some statistics Population demographics 7% 0-9 3% 4% 23% 10-14 5% 15-19 20-24 5% 25-29 30-34 35-39 7% 40-44 12% 45-49 7% 50-54 10% 55-59 8% 9% Above 60
  16. 16. An illustration Profile Mr. Arun Kumar Age: 65 yrs Employment Status: Retired Pension: Rs. 10,000 Dependents: 1 Wife Children: 1 daughter who is married Property: 1 house worth 67 lakhs
  17. 17. An illustration Mr. Arun Kumar is eligible for a reverse mortgage loan from SBI with the following specifications: Tenure 10 yrs 15 yrs Periodicity of monthly/quarterly monthly/quarterly payment Interest Rate 10.75 pa 10.75 pa Monthly Payment 28,080 13,500 Quarterly Payment 85,380 41,220 Lumpsum 21,61,320 12,97,140 Payment
  18. 18. THANK YOU