Reverse Mortgage
A few days ago I found myself listening to a talk on Indian Retail Banking trends by Senior Vice President HSBC. As he talked about Micro-finance, I was damn happy. Check my previous post on the subject. So my thought projectiles have the correct inclination of 45 degrees only the initial velocity is puny hence they don’t travel all the way.
Here I shoot another one. This one’s called Reverse Mortgage.
Introduction: I shall explain with an example my readers would easily relate to. Here you were introduced to Mutthuswamy. Mutthu and Revathy are now a old couple, in their sixties. Fate kept quirking around and Mutthu bought the house just before the road bent. Now, almost thirty years since that seminal eye-lock this house is the sole asset they possess. Revathy’s sentimotions ensure that the house never gets sold. So, how does our snake man keep himself and his old woman alive for whatever years are left between them. He decides to reverse mortgage the house.
Definition: What has Mutthu actually done? Simple.. his bank has agreed to pay him a monthly installment for the next 15 years. After this period elapses the bank can either sell off the house in the open market or to Mutthu’s kin. Important, during the 15 years Muthhu is the owner of the house not his bank.
Eligibility: A recent RBI ruling has shown the green signal for reverse mortgage in India. Hitherto, it existed only in mature advanced economies like the US & Europe. In the US only citizens over 62 are eligible for a reverse mortgage. India’s 130 odd ranking in WHO annual report is a good proxy for assuming this figure to be 58-60 in the Indian context. Second condition is, the house should be free from any loan obligations.
Rationale for Mutthu: Isnt it great for him !. He gets to keep his wife happy by retaining ownership. He continues to live in the house. Further, he gets a neat sum of money every month till he dies! Help age India
Rationale for Bank: umm.. this is where it gets damn interesting. On prima facie it appears inane, but it ain’t. This is a very cleverly structured product which can generate decent returns. First caveat 15 years… its reasonable to assume greater than 50% will not live that long. Second caveat the service charges and hidden fees, definite money spinner for banks. Third caveat, with the real estate boom in India, its anybody’s guess where prices would be 15 years from now.
Risks for Bank: ummmmm..this is where it gets even more damn interesting! If the guys get their valuations wrong and arrive at a ‘wrong’ monthly installment for Mutthu, the bank is screwed. One important tenet of a reverse mortgage is the bank bears the risk of market valutions to be lower than the actual price of house when it attempts to sell.
Potential: Immense. Its reasonable to assume about 20% of India’s 1 bn plus population is over 58. In this sample, even if 50% own a house or property at retirement, that’s a sizable target market for reverse mortgage.
Here I shoot another one. This one’s called Reverse Mortgage.
Introduction: I shall explain with an example my readers would easily relate to. Here you were introduced to Mutthuswamy. Mutthu and Revathy are now a old couple, in their sixties. Fate kept quirking around and Mutthu bought the house just before the road bent. Now, almost thirty years since that seminal eye-lock this house is the sole asset they possess. Revathy’s sentimotions ensure that the house never gets sold. So, how does our snake man keep himself and his old woman alive for whatever years are left between them. He decides to reverse mortgage the house.
Definition: What has Mutthu actually done? Simple.. his bank has agreed to pay him a monthly installment for the next 15 years. After this period elapses the bank can either sell off the house in the open market or to Mutthu’s kin. Important, during the 15 years Muthhu is the owner of the house not his bank.
Eligibility: A recent RBI ruling has shown the green signal for reverse mortgage in India. Hitherto, it existed only in mature advanced economies like the US & Europe. In the US only citizens over 62 are eligible for a reverse mortgage. India’s 130 odd ranking in WHO annual report is a good proxy for assuming this figure to be 58-60 in the Indian context. Second condition is, the house should be free from any loan obligations.
Rationale for Mutthu: Isnt it great for him !. He gets to keep his wife happy by retaining ownership. He continues to live in the house. Further, he gets a neat sum of money every month till he dies! Help age India
Rationale for Bank: umm.. this is where it gets damn interesting. On prima facie it appears inane, but it ain’t. This is a very cleverly structured product which can generate decent returns. First caveat 15 years… its reasonable to assume greater than 50% will not live that long. Second caveat the service charges and hidden fees, definite money spinner for banks. Third caveat, with the real estate boom in India, its anybody’s guess where prices would be 15 years from now.
Risks for Bank: ummmmm..this is where it gets even more damn interesting! If the guys get their valuations wrong and arrive at a ‘wrong’ monthly installment for Mutthu, the bank is screwed. One important tenet of a reverse mortgage is the bank bears the risk of market valutions to be lower than the actual price of house when it attempts to sell.
Potential: Immense. Its reasonable to assume about 20% of India’s 1 bn plus population is over 58. In this sample, even if 50% own a house or property at retirement, that’s a sizable target market for reverse mortgage.
Labels: reverse mortgage
3 comments
Works fine for Mutthu coz he has no kids (am guessing they decided against procreation) ....thanx for education, 666...I know i can depend on u for that...:)
my pea-sized grey cells(as Jas calls hers)cud not have grasped the concept had u not explained the way u did ........three cheers for Mutthu and Revathy.....:)
I knew this :), but I don't think this is going to work very well in india :), most people want to pass on their legacy to their children, thats why they want the house in the first place.
Bankers are clever people! :)
If Mutthu wasnt so old, i wud've suggested him to sell the house & rent it back & then invest the remaining money himself rather than take the bankers word on what his house shd be valued at. Especially so in India where 'white' market value and 'white+black' values of houses are too different things!!
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