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India in reverse mortgage mode

The Union Budget proposals of 2007-08 included the introduction of 'reverse mortgages' in Indian markets. The mortgage market in India is reasonably large. Its estimated size is around $33-39 billion, which is around 5% of the GDP. In other emerging countries such as China, the mortgage to GDP ratio is around 11% and in a developed country like the US, it is 52%.

So What is a 'reverse mortgage'?


In a regular mortgage, a borrower will get a loan from the lender at a particular interest rate and tenor, mortgaging his new or existing house. The borrower will then repay the loan in the form of equated monthly installments (EMIs), where a portion of the principal and the interest is repaid monthly. Usually, as time progresses, the share of principal in the EMI comes down and the share of interest rises.

In a typical 'reverse mortgage', an existing home owner can generate cash flows (loan) from his house without selling it and continue to stay in it as along as he is alive. The borrower need not bother to repay it, till his death or till he sells the house. There is no question of the credit assessment of the borrower. Reverse mortgages help 'cash poor, house rich' seniors to meet their financial obligations during their golden years, and yet continue to live in their house. This means the individuals, above the age of 62 with a limited income, can now pledge their house to a bank for a loan that they'll receive while still living in the house.

When the person passes away, banks would recover the loan and interest after selling the house and pass on the rest of the amount to an heir or anybody the individual identifies. The loan amount would be fixed after assessing the value of the property and the person's age. For now the loan period at 15 years. In India, most parents would want their children to inherit their houses even if they have to compromise on their freedom. But this may be a boon for many senior citizens who are childless.

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