Senior citizens – a significant constituent of the Indian
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.
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.
What is it?
A special type of loan opportunity available to the senior
Used to convert part of the home equity into tax free
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
Line of credit
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
The cost to the borrower
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 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.
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.
This scheme provides social security to the senior
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
The banks can adopt a floating rate of interest with a
ceiling, beyond which the rate cannot exceed.
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
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
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
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
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.
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
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
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