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Reverse Mortgage: A Tool For Old Age Pensions: Presented By:VINAY HANS

Reverse mortgages allow elderly homeowners to access equity in their homes. They receive regular payments from the lender and the loan is repaid upon death using home sale proceeds. Key benefits include supplementing retirement income without dependence on others and retaining home ownership. Limitations include high costs and potentially reducing inheritance for heirs. Overall, reverse mortgages provide an important financial lifeline for many retirees in India who lack formal pension coverage.

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80 views17 pages

Reverse Mortgage: A Tool For Old Age Pensions: Presented By:VINAY HANS

Reverse mortgages allow elderly homeowners to access equity in their homes. They receive regular payments from the lender and the loan is repaid upon death using home sale proceeds. Key benefits include supplementing retirement income without dependence on others and retaining home ownership. Limitations include high costs and potentially reducing inheritance for heirs. Overall, reverse mortgages provide an important financial lifeline for many retirees in India who lack formal pension coverage.

Uploaded by

anurag_sant
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Reverse Mortgage : A tool for

Old Age Pensions

Presented By :VINAY HANS


What is Reverse Mortgage?
Reverse mortgage can be defined as "an
agreement by which a home owner borrows
against the equity in his home and receives
regular tax free payments from the lender.''
Here equity is the value of the property over
and above any mortgage or other liabilities
relating to it
How Reverse Mortgage is different
from Mortgage Loan?
• In case of a mortgage loan the borrower gets a
lump sum amount and earns by investing the same
in business etc. and repays the same in monthly
instalments or as per the agreed terms. In reverse
mortgage the borrower receives the money in
monthly instalments and the dues are recovered
from the sale proceeds of the property after the
death of last surviving spouse.
Features of Reverse Mortgage
• Above 60 years
• Applicable to self acquired and self occupied
properties
• Amount of loan would depend on MV of
residential property
• Borrower’s equity in the residential property
does not fall below 10% during the tenor of
the loan.
Contd…
• The borrower will not be required to pay any
penalty towards prepayment of loan.
• The lending institutions can frame their respective
internal policy guidelines but the same should be
fully disclosed to the potential borrowers upfront.
• The amount received through reverse mortgage is
considered as loan and not income; hence the
same will not attract any tax liability.
Why Reverse Mortgage ?
• According to the 1991 census reports, India has
an estimated 314 million workers, of which a
mere 11 % are covered by the formal pension
system. For the majority,personal savings are
their only source of retirement income.

• Contd…
Some demographic projections for India indicate
that the number of elderly (>60 yrs) will
increase to 113 million by 2016, 179 million
by 2026, and 218 million by 2030. Their share
in the total population is projected to be 8.9 %
by 2016 and 13.3% by 2026. The dependency
ratio is projected to rise from 15% as of now to
about 40% in the next four decades
Factors considered in determining
loan amount.

• Age of borrower(s)
• Loan term
• Interest rate and loan costs
• Outstanding liens to be repaid
• Size of lump sum disbursement

.
How does it works ?
• Suppose the value of your house is assessed at Rs 40 lakh (Rs
4 million) and you are 65 years of age. Under the present
recommendations, you will be eligible to get a loan for 15
years that is till you turn 80 years of age.
• Supposing you are eligible to unlock 60 per cent of the value
of the house, then you can receive Rs 24 lakh (Rs 2.4 million)
through reverse mortgage. And supposing you are eligible to
receive Rs 8,000 every month, you will receive Rs 96,000
every year for the next 15 years, assuming that changes in the
value of the property do not affect the payments to you.
• At the end of 15 years you would have received a total of Rs
14.40 lakh (Rs 1.44 million). The interest component
(compounded annually) on this amount, will be Rs 21.38 lakh
(Rs 2.1 million).
• So the total amount that you owe to the bank will be Rs 35.78
lakh (Rs 3.6 million). However, if you die at end of the loan
tenure, then the bank will sell the property to realise what you
owe them, that is Rs 35.78 lakh, the balance will be passed on
to your heirs.
• Supposing the value of your property has
appreciated to Rs 65 lakh (Rs 6.5 million)
during the tenure of the loan, your heirs will
receive Rs 29.21 lakh (Rs 2.9 million).
Benefits
• Excess Equity returned to the heirs
• There is no upper age limit for getting the
benefit of the reverse mortgage facility. On the
contrary, the older one is, the easier it would
be to get the loan.
• Can be taken at any time
• It is a non-recourse loan where lender does not
have legal recourse to
anything other than the value of the home
when the loan is to be paid off.
Limitations
• Reverse mortgage is still treated as an
unconventional retirement tool.
• Pricing is extremely complex
• Closure and servicing costs – From the angle
of the borrower, the upfront cost,
• Servicing cost and the closure costs are very
high. Hence it is recommended that
they should go for this product only if they
want annuity for 15 years or so.
• On the borrower's side, the biggest challenge
would be balancing the need
for supplementing retirement income and the
desire and wish to bequeath homes to children.
• For many seniors who have worked a lifetime
to pay off a housing loan, to go
back into debt would be difficult irrespective
of the merits of the scheme.
Conclusion
• Reverse mortgage is definitely a financial
helpline for senior citizens enabling them to
lead their lifestyle and meet their consumption
needs without being dependent on anyone. It is
the social security scheme for the benefit of
senior citizens post-retirement. With very few
universal old age social security schemes,
reverse mortgage might have a potential
market.
Contd…
• The loan is given without any income criteria
at an age where normal loans are not available.
Perhaps, the most important advantage being
that the borrower retains the ownership title of
the house making it all the more popular
among Indians who have a natural instinct for
own home.

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