reverse mortage

7/27/2019 Reverse Mortage

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Retirement planning is an on going process. Duringthe initial stages of planning, clients goals aredetermined by quantifying them in rupee terms.

Once goals are fixed, asset allocation is done as

per the clients risk profile and investments aremade accordingly. After this, there is a need tomonitor the plan at regular intervals and undertakeconstant review of portfolio evaluation.

Portfolio evaluation is the process of going throughthe existing portfolio of the client to check whetherthe current asset allocation is in line with his futurefinancial requirements.


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Reasons for conducting regularevaluation of ones portfolio

Changes in life cycle stage of the client for instance,the client may get married and there may be a need for a

change in the asset allocation.

To contain systematic risk - the evolving dynamicmarket conditions require review/changes in the assetallocation.


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ExampleRajesh and Bina are a just married couple. Lets take a look at theirfinancial situation and chalk out a financial plan for them.

Age : Rajesh 26 yrs; Bina 25 yrs;Number of dependants : None;Occupation : Rajesh - Accountant; Bina IT Security officerMonthly income : Rajesh Rs 50,000 pm; Bina Rs 30,000 p.m.;

Monthly expenses : Rs 30,000 p.m.Monthly savings : Rs 50,000 p.m.;Assets : Own house;Insurance : No insurance policies taken yet;Investments : Bank FD Rs 5 lacs,Gold Rs 5 lacs;

Mutual funds Rs 3 lacs;Balance in bank savings account Rs 3 lacs.


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Future financial goals (a) Buy a car in 2 years down-payment required is Rs 2 lacs (in todays

value)

(b) Holiday in Europe in 5 years Amount (in todays value) Rs 6 lacs

(c) Provide for couples retirement in 30 years Amount required Rs50,000 pm (in todays value) for 20 years after retirement;


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Analysis

Rajesh and Bina are a just married couple with the above future goals. Surplus funds lying idle in their bank account to the tune of Rs 3 lacs. To start off, they can create a contingency fund by putting away 6

months expenses (amounting to Rs 180,000) in liquid mutual funds orauto-sweep facility in their savings account to counter any suddenemergencies in future.

The balance in the savings account (Rs 120,000) maybe diverted intobuying adequate life and health insurance for couple and invest

the rest (either through lump sum or regular contributions) to reachtheir above specified goals.


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Reverse mortgage

A reverse mortgage is a loan available to senior citizens. As its namesuggests, it is exactly opposite of a typical home loan, whererepayments are made to the housing finance company (HFC)/ bankevery month until the tenure of the loan. Reverse mortgage is sonamed because the payment stream is reversed, that is instead of theborrower making monthly payments to the lender, the lender makes

payments to the borrower.The process is simple. Once you pledge your house for reversemortgage with any HFC/ bank, the HFC/ bank estimates the value ofthe house. Then, taking into account the cost of credit, it makesmonthly payments to you.The loan is typically settled after the deathof the owner/co-owners.


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Features of Reverse Mortgage

1. In a typical mortgage, you borrow money in lump

sum right at the beginning and then pay it backover a period of time using Equated MonthlyInstalments (EMIs). In reverse mortgage, youpledge a proper ty you already own (with no

existing loan outstanding against it). The bank, inturn, gives you a series of cash-flows for a fixedtenure.

2. The scheme is applicable for the entire country

including rural areas. The property should bemortgagable. In some rural areas agricultural landcannot be mortgaged and hence reverse mortgageloans cannot be considered against a house

constructed on such agricultural land.


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3. Eligibility Criteria Indian citizen of 60 years or more, Married couples will be eligible as joint borrowers for joint assistance.

In such cases, the age criteria for the couple would be at thediscretion of the RML lender, subject to at least one of them beingabove 60 years of age and the other not below 55 years of age.

Should be the owner of a residential property (house or flat) locatedin India, with clear title indicating the prospective borrowersownership

of the property. The residential property should be free from anyencumbrances.

The residual life of the property should be at least 20 years. There isno minimum period of ownership of property required.

The prospective borrower(s) should use that residential property aspermanent primary residence.


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4. The amount of loan available under RML depends on the age of theborrower, appraised value of the house and the prevalent interest

rates of the lending institution.

5. A reverse mortgage loan cannot be availed against commercialproperty.The property should be self-acquired, self-occupied andhaving clear title in favor of the borrower.

6. The rate of interest and the nature of interest (fixed or floating) willbe decided by the lender. The rate of interest is determined by marketconditions. Therefore, each lender will determine its lending rate as perits own policy. Each lending institution offers loans as per its ownlending policy and the borrower can decide whether to take the loan onfixed or floating basis depending upon the respective terms.

7 . The maximum tenure of an RML will be 20 years.


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On the borrowers death or on theborrower leaving the house propertypermanently, the loan is repaidalong with accumulated interest,through sale of the house property.

The borrower(s)/heir(s) can alsorepay the loan with accumulatedinterest and have the mortgagereleased without resorting to sale ofthe property.

The borrower(s) or his/her heirs alsohave the option of prepaying theloan at any time during the loantenor or later, without anyprepayment levy.

reverse mortage

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