Presentation on Reverse Mortgage Product

8/4/2019 Presentation on Reverse Mortgage Product

1/21

WELCOME

TO A PRESENTATION ON

REVERSE MORTGAGE LOAN-ENABLEDANNUITY SCHEME

- A GROUP PRODUCT OF

L.I.C. OF INDIA


2/21

WHAT IS REVERSE MORTGAGE?

A Reverse Mortgage is a loan available toseniors and is used to release the homeequity in the property as one lump sum ormultiple payments. The homeowner'sobligation to repay the loan is deferred

until the owner dies, the home is sold, orthe owner leaves (e.g., into aged care)


3/21

The analysis of definition provides some

basic features of Reverse Mortgage products. These are

The loan is available only to senior citizens owning ahome.

The loan can be in the form of Lump-sum or multiplepayments like annuity etc.

Homeowner does not have obligation to repay theloan till the house is his prime residence.

The payback is done once the owner dies or leavesthe house. This is done though selling the house andrecovering the loan through its proceeds.


4/21

Thus a home owner going for Reverse

Mortgage may take his payment in thefollowing form:

A lump sum at the beginning (can be used for

home improvement health expenses etc) Monthly payments till a fixed term

Monthly payments as a life-long annuity

Establishing a credit-line with or withoutaccrual of interest on credit balance

A combination of the above


5/21

Pricing of Reverse Mortgage Products Age of the borrower-If it is a joint borrowing then

the age of the younger borrower is considered.

Value of the property- Then value of the property

plays a major role in determining the price for an

RM product.

Expected Interest Rate- As the product resembles

the normal annuity product in some sense, thecurrent and expected interest also plays a major

role in pricing the product.


6/21

Significance of Reverse

Mortgage System in India The society in India has undergone huge

changes in last 4-5 decades. Nuclear family has

replaced the joint family system. The supportsystem that was available to family elders has

almost vanished. We have no state-sponsored

public pension system to provide an alternatesupport to old people. This condition leaves

the older people in jeopardy.


7/21

They face following issues:

Outliving their retirement income.

Depending on their children to help pay

expenses. Getting sick and having no way to pay the

expenses.

Not being able to guarantee an income for their

spouse after they are gone. Being able to live as long as they like in their

own home.


8/21

Reverse mortgage or equity release

products provides a solution to these issues Every Indian, irrespective of its income level tries to

build a home for himself during his working life.

Reverse mortgage will give him/her an opportunity

to generate income from that very home.

As the ownership remains with the borrower, he

can transfer the home to his successors also, if the

latter agrees to pay the loan amount. Such a product relieves the pressure on government

also to provide old age security and thus

government also needs to support such initiative.


9/21

Why is it Not Clicking in India? Till now, a very small number of applicants have

availed this loan in India since its inception in2007, according to sources from banks & otherlending institutions.

The reasons for the model not taking off in Indiaare manifold. From an emotional attachmentwith ones house to real estate price correction;from an absence of clear guidance against legal

complications to inadequate marketing, the planhas been unable to meet the expectations offinancial institutions.


10/21

Why is it Not Clicking in India?..Contd..

There are some very basic reasons that have worked against this

product which has taken off rather well in international markets.

The psyche of Indians does not make them comfortable with the

idea of selling their home. This could be perhaps because better

awareness had not been created about the product.

Secondly, the Indian lending institutions cap the available loan

amount at Rs 50 lakhs, instead of providing for an equitable

percentage of the property's value, and limits the loan period to a

tenure of 15 years. The product is still evolving and may take on new dimensions

depending on how the banks can present its consumer appeal.


11/21

RELEVANCE TO INDIA MARKET

The number of elderly (>60 yrs) will increase to 113million by 2016, 179 million by 2026, and 218 millionby 2030. Their share in the total population is

projected to be 8.9 % by 2016 and 13.3% by 2026. Thedependency ratio is projected to rise from 15% as ofnow, to about 40% in the next four decades.

The percentage of >60 in the population of TamilNadu and Kerala will reach about 15% by 2020 itself!

Life expectancy at age 60, which is around 17 yrsnow, will increase to around 20 by 2020.


12/21

Market Potential

Considering the above facts in mind, if we assumethat about 20% of the eligible elderly population willtake the advantage of RML, the total number of loanswould be of the order of 18 Million in 2010, 28 Millionby 2016 and 44 Million by 2030. If the average eligibleamount of one loan is taken to a conservative sumequal to Rupees 1 Million per borrower, the total RMLmarket size will become in the range of Rupees 20 to

25 Trillion. This is a huge market and cannot beignored in terms of opportunity by the lenders andalso social security measure by the borrowers and theGovernment of India.


13/21

Regulatory Mechanism in India

Reverse Mortgage Loans (RMLs): Primary LendingInstitutions (PLIs) viz. Scheduled Banks and HousingFinance Companies registered with NHB have beenallowed to extend it.

Eligible Borrowers: The borrower should be more than 60years and the spouse should not be less than 55 years ofage. The minimum residual life of the property should be20 years

Determination of Eligible Amount of Loan: Depends onthe value of the property, age of the borrower and theprevalent interest rate. The PLI should ensure that theEquity to Value Ratio (EVR) should never be less than 10%.


14/21

SALIENT FEATURES OF NHB POLICY AS

REGARDS REVERSE MORTGAGE SCHEME

Nature of Payment: Monthly, Quarterly, Half Yearly, Yearly or RevolvingCredit. However a cap of Rs 50000/ on monthly and Rs 1500000/ or 50% ofthe eligible amount have been introduced.

Eligible End use of Funds: Allowed for the purposes beneficial to thesenior citizens and prohibited for activities like speculation.

Period of Loan: Maximum 20 years (Revised from 15 years earlier).

Interest Rate: The interest rate to be charged on the RML to be extendedto the borrower(s) may be fixed by PLI. Fixed and floating rate of interestmay be offered.

Security: The RML shall be secured by way of mortgage of only residential(not commercial) property in favour of PLI.


15/21

SALIENT FEATURES OF NHB POLICY AS

REGARDS REVERSE MORTGAGE SCHEME Valuation of Residential Property: Periodic, compulsory in every 5

years.

Taxation: All payments to the borrower from the PLI are income taxexempt as the same are considered as capital payments rather thanincome.

Provision for Right to Rescission: 3 working days time is given for thisLoan Disbursement by Lender to Borrower: PLI is expected to paydirectly to the borrowers except in certain special situations

Title Closing: The PLIs will provide a fair and complete package of reverse mortgage loan material and specimen documents, covering thebenefits and obligations of the product.

Settlement of Loan: All the conditions under which the loan is due arelisted.


16/21

SALIENT FEATURES OF NHB POLICY AS REGARDS

REVERSE MORTGAGE SCHEME

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.

Loan Covenants, Indemnity/Insurance, Foreclosure: Option for PLI to AdjustPayments

Title Indemnity /Insurance: PLI will have the obligation of ensuring clarity on

title of the residential property

Foreclosure: Several events are listed on the occurrence of which the loan

would be liable for foreclosure.

PLIs Option to Adjust Payments

Counseling and Information to Borrowers


17/21

Role of life insurers in

Reverse mortgage market Better understanding of mortality/longevity trends- Life insurers have

better research about mortality trends and so they have better abilityto measure longevity risks which is one of the major risk in the product.

This also helps in development in the market as the life insurers canprovide option of life annuity to borrowers rather than payment forfixed term. A life annuity will help the borrower to have income even atthe time when he is very old.

Long Term Player- Reverse Mortgage is a long term product. Lifeinsurers being long term players in the financial market, they haveability to estimate and manage long term interest rate movements andthus manage the interest rate and other risk in better manner.

Natural Hedge- Life insurers are on a better footing to hedge reversemortgage product risk with their portfolio of life insurance benefits.


18/21

LICs REVERSE MORTGAGE

LOAN-ENABLED ANNUITY SCHEME

The Master Policy Holder shall be Scheduled

Commercial Bank/Housing Finance companies.

The beneficiary of the Product shall be the

borrowers.

Annuity shall be of the following types:

1. Annuity for life

2. Joint life annuity

3. Annuity for life with Return of Capital.


19/21

LICs REVERSE MORTGAGE

LOAN-ENABLED ANNUITY SCHEME

The Annuity disbursement shall be directly credited throughECS to the specified account of the beneficiary.

In case the Annuity option exercised by the borrower is

Annuity for Life with Return of Capital, the PurchasePrice is returnable to the Master policy Holder. Thebank/finance company may purchase a fresh Annuity incase the surviving borrower opts.

In case of pre-payment of the loan, the Bank/FinancialInstitution shall inform the Insurance company aboutsuch pre-payment. The Annuitant shall, thereafter,receive the Annuity payments directly from LIC as per theterms of the Annuity.


20/21

THE POWER OF SYNERGY BETWEENMOST CUSTOMER-FRIENDLY BANK OF THE

COUNTRY&

THE UNDISPUTED LEADER OF THE INDIAN LIFE INSURANCEINDUSTRY WELL AFTER A DECADE OF PRIVATIZATION

CAN WORK MIRACLES

TOGETHER WE SHALLAGGRESSIVELY FORAY INTO THIS YET GROSSLY

UNDER-EXPLORED ARENA TO CREATE

A GREAT WIN-ALL SCENARIO


21/21

THANK YOU

P & GS UNIT,

MANGALORE,UDUPI DIVISION

Presentation on Reverse Mortgage Product

Documents

Transcript of Presentation on Reverse Mortgage Product