- What is a reverse mortgage
- Types of reverse mortgage
- What requirements must you meet to apply for a reverse mortgage?
- Advantages of the reverse mortgage
- Disadvantages of the mixed rate mortgage
- How to decide if it is worth hiring one
What is a reverse mortgage
As its name indicates, a reverse mortgage works the other way around. Instead of borrowing money to buy real estate, It is the bank that pays the client a monthly rent in exchange for the client offering their home as collateral..
It is a type of mortgage loan that is aimed mainly at people who are over 65 years old (although those who are dependent or who prove a degree of disability equal to or greater than 33%) and who own a housing, according to the Bank of Spain.
This formula allows these users to collect extra money to supplement their pension, while they can continue to use the home until their death. When this occurs, your heirs will have the choice between returning the loan to the bank to recover the property or collect the remaining amount, if there is still a part. However, a reverse mortgage can have more than one owner. If so, it will only be considered expired when both holders have died.
Types of reverse mortgage
Depending on the type of income and the terms, you can distinguish between three types of reverse mortgage:
- Temporary Reverse Mortgage: the entity pays the owner an income linked to the value of the home in the form of a monthly installment and for a set period of time. The fact that the duration is limited implies that, if the mortgaged exceeds the estimated age and the installments cover the value of the home, they will no longer receive income. In any case, he will not lose the use of it.
- Reverse Life Mortgage: the owner is guaranteed a monthly income for the rest of his life. The absence of deadlines translates into a fee that will be lower than that of the temporary modality. This type of loan is usually linked to a life annuity insurance, which would be activated in the event that the holder’s life extends beyond the value of the mortgage, and would be in charge of continuing to pay the rents until his death.
- Single Draw Reverse Mortgage: the owner receives a single payment at the beginning of the mortgage, which corresponds to the appraised value of the home.
What requirements must you meet to apply for a reverse mortgage?
Although the specific requirements and conditions depend on each bank, You can only take out a reverse mortgage if you fit into a very specific profile. The product is generally limited to people older than 65 yearsalthough it can also be requested by people in a situation of dependence o severe disabilityregardless of his age.
The applicant must have a home owned, preferably free of charges. That is to say, that no type of embargo, debt, resolution clause or mortgage weighs on it. If the mortgage has not yet been paid off, the outstanding amount would be added to the reverse mortgage loan.
Although it can be the habitual residence or a second home, it is usually valued that it is the first assumption, since it will not be necessary to face the Tax on Documented Legal Acts in the constitution of the loan. Instead of evaluating your income level and financial solvency, the bank will value above all that the house has a high market valueto the extent that you can place the property or take advantage of it easily.
Advantages of the reverse mortgage
- Fiscal benefits. The income obtained through a reverse mortgage is not taxed in the IRPF because they are considered as dispositions of a credit. That is, you will not have to pay taxes on the loan, with the only exception that the money is received from the annuity insurance. If it is the main residence, it will also be possible to enjoy the extension of the Documented Legal Acts tax (AJD).
- extra income. You can supplement your pension or your other income with this monthly income.
- Security. Even if it is mortgaged and the terms are met, the home will remain yours and you will be able to continue living in it until the moment of death.
- Compatibility with other options. The reverse mortgage is compatible with the rental of the property. Therefore, if you have another property or live in another place, it would allow you to have an additional income each month.
Disadvantages of the mixed rate mortgage
- amount of income. Although it can be very useful as a complement, the amount of money you will receive in a reverse mortgage will not be enough for you to live on it.
- A burden to the heirs. The debt contracted with the bank does not affect the owner, but it does affect his heirs. They are the ones who will have to pay off the debt, if they do not want to be left without the house. If when the time comes, the property ends up being worth less than the loan, it will also be the heirs who assume the difference.
- risks. Since the rents receivable are not updated in this type of mortgage, the capital will progressively lose value due to the effect of inflation. Likewise, if the life annuity insurance is contracted as a single premium, the final price could skyrocket.
How to decide if it is worth hiring one
Until now, the reverse mortgage as a financial product has not been very successful in Spain. Its complexity and lack of information have not contributed to generating confidence in this option. Despite its low penetration, the formula makes sense in a country in which the vast majority of those over 65 years of age own a property.
In general terms, Taking out a reverse mortgage can be convenient if you do not intend to sell your home throughout your life or leave it to anyone as an inheritance. And in case there are heirs, if you are certain that they will be able to assume the debt. In this case, this extra income to complement your pension could come in handy.
Nevertheless, doing so has significant risks that should be considered before. Also, keep in mind that the fees will be higher the higher the value of your house, the older you are and the sooner the bank understands that you can recover the investment.
If these circumstances make it not worth it for you, there are other alternatives that you can use beyond the reverse mortgage. Some of them go through the rental or sale of the home itself, and even bare ownership.
–
