What is the reverse mortgage and how does it work, a financial product to complement the pension
The uncertainty created by pension reforms designed by the Minister of Inclusion, Social Security and Migration, Jose Luis Escriva; the reduced amount of 50% of contributory retirement pensions, which do not reach 1,000 euros per month in 14 payments; and an economic context with too many clouds have given wings to reverse mortgages, a financial product, intended for the elderly that allows an extra monthly income in exchange for selling the property of the home, without losing ownership and living in it. In Europe, this instrument is widely accepted and its demand has been increasing for years as a complement to the pensioners payrollbut in Spain its evolution until recently has been slow, with peaks in times of crisis, such as that of 2008.
The latest known data through the General Council of Notaries show a change in trend due to a significant increase in operations so far this year, but which began in June last year. Only in the first two quarters of 2022 have the same agreements been signed reverse mortgages than in all of 2021 and in 2019 and almost twice as much as in 2020, the year of the coronavirus pandemic. In Spain there is enormous growth potential for this product, within a market led by insurance companies, which has recently been incorporated Santander Bankwhich has allied itself with Mapfre.
The amount of reverse mortgage operations is very high and on average was 430,000 euros in the second quarter of the year
The amount of each of these operations is very high and on average was 430,000 euros in the second quarter of the year, a figure more than three times higher than that of the average traditional mortgage and which shows the excellent business that can be achieved in a increasingly aging country, with a considerable increase in pensioners, which will accelerate in the coming years with the arrival of the baby boomer generation, and with citizens over 65 years of age rich in brick, but poor in income, who receive an average pension slightly higher than 1,200 euros per month. Obtaining a reverse mortgage is possible in most of the banks, but it is a product that is not advertised and it is necessary to ‘fight’ it with those responsible for the entity. Well negotiated it can be a very attractive resource and the pension lifeguard, but it can also become the worst business for retirees. Despite the low volume of transactions, it is a financial instrument with some relevance in court.
While the main savings instrument for retirement –pension plans– collapses and begins to show its less friendly face, due to the drastic reduction in tax incentives for the individual system -which has also dragged down the employment system- and the negative effect on its profitability of the latest increases in interest rates and the significant drop in the stock market in recent months, the Bank of Spain has already pointed to reverse mortgages as an alternative to supplement pensions.
Those over 65 years of age have their properties free of charges
In Spain, the owners of four out of ten properties that no longer support a mortgage are on average 65 years old. In total, they own 3.1 million fully paid-up main homes, according to the National Statistics Institute (INE) and only 171,000 maintain a mortgage. In our country there are 9.3 million citizens over 65 years of age and, as is logical, at least two people live in most of these main properties. Meanwhile, six out of every hundred citizens aged between 65 and 74 have, in addition to their habitual residence, other real estate properties.
Julián Franco, managing partner of More lifea company that markets the reverse mortgage of the insurer Caser, points out that “the demand for reverse mortgages will continue to grow in the coming months. Unlike sales operations of bare property or real estate life annuity, in which ownership of the house is transferred in exchange for a single payment or rent -although in both cases you can continue to enjoy the home-, in financing through a reverse mortgage the property is not transferred, but financing is obtained with the guarantee of the same. Despite everything, the less than 200 reverse mortgages signed so far this year are far from those signed in other countries, such as the United Kingdomwhich exceeded 45.5oo in 2019, in a potential market very similar to the Spanish one.
Conditions to be able to contract a reverse mortgage
To subscribe to a reverse mortgage it is necessary to own a home and be over 65 years of age. In addition, people who prove a degree of disability equal to or greater than 33% or dependents who own a property can join this product. The beneficiary of this product does not have to pay taxes on the income obtained in the statement of income. Unlike a conventional mortgage, it is the owner who receives an amount from the bank in exchange for the flat, most of the time in the form of monthly rent, but a single payment or a mixed formula is also possible.
The amount varies depending on the value of the home, the age of the person taking out the loan and their spouse, or whether it is decided to receive the rent for a certain period or lifetime form. Other keys are that the bank cannot demand the accumulated debt until the beneficiary or the last beneficiary of this product dies. After the death of the subscriber, the heirs can keep the house and pay off debt or take out a conventional mortgage so they can own the home. Another option is to sell the house and settle the debt with the entity and if the money is not enough, the bank can encourage the sale of other assets.
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