Reverse Mortgage – EXTRA Income for people over 65
The Reverse Mortgage is among the many financial operations to which the clients of banking entities have access but, mainly due to total or partial ignorance, we are not even interested in them, although they may represent a benefit for our economy in the short or long term.
One of those services may be the reverse mortgage, an operation designed for people over 65 who want to have peace of mind and economic stability that only with their retirement pay they can not get.
Read these testimonials:
Jose Rodriguez. (Retired 67 years old)
I have worked all my life and my only saving is my house. My pension today does not exceed € 750 but thanks to a reverse mortgage I can increase my income what is necessary to enjoy my retirement.
Maria Jose Rodriguez (retired 70 years)
In my years, the cost of living makes it very difficult for me to reach the end of the month. A loan obtained thanks to a reverse mortgage allows me to live in a more comfortable way.
These are two of the many cases that exist on the possibilities offered by a loan with a reverse mortgage on a home. In this article you will know why these people improved their economic situation thanks to a reverse mortgage.
What is a reverse mortgage
Not all mortgages work the same way nor are they intended for the same type of recipient. In the case of reverse mortgages, there is a very specific client pattern to which they are directed by their defining characteristics.
As we have indicated previously, a reverse mortgage is a very useful way to have extra income that completes the retirement pension, especially in cases where it is too low to meet the monthly expenses of the user or client.
Reverse mortgages are aimed at people over 65, that is, they are retired and no longer exercise and who normally receive a public pension for the years worked when they were active.
Actually the reverse mortgage is a credit or loan that the banking entity with which this agreement is signed grants in a single payment or in the form of regular benefits, as agreed, on the mortgage of the habitual residence or on other real estate.
Thus, while the homeowner lives, he receives a guaranteed economic amount for his home, in which he can reside until he dies.
And when he dies, there may be different options:
- That the bank takes it in property, and therefore can do with it what it wishes: to sell it, to lease it or simply to keep it.
- That the heirs of the signatory of the reverse mortgage, if any and were interested, return the money received until then and recover it as family assets.
- That, if they do not want housing but there are still installments of the loan receivable, they receive them.
It is, in some way, a tool to transform material goods into economic liquidity, that is, the conversion of real estate assets into income, but with the added benefit of being able to continue residing in the home without any problem.
Although seen this way it does not seem a bad option for the elderly who need to clean up their economy or at least have a higher income, being an extended modality in countries such as the United States or the United Kingdom, the truth is that the reverse mortgages in our country have not ended to curdle completely due to some issues.
One of them is that it is not always easy for older clients to understand the operation of reverse mortgages, and therefore, reject them at the root.
It is also influenced by the fear of losing their home, signing a clause that harms them or facing the negative opinion of their heirs, because the housing provided for the reverse mortgage ceases to appear in the family inheritance or may be left with charges.
Another factor that has caused that it has not had the claim that it should have been the financial crisis that occurred in 2008, the explosion of the housing bubble and the devaluation of the price of housing that was lived for several years.
All this led to a very low appraisal value that did not interest the homeowners.
But currently the situation is no longer the same and it can be an alternative to annuity insurance, another of the savings solutions for those over 65 years of age.
How a reverse mortgage works
The money that each client receives depends on several factors:
- Customer’s age
- The economic value of housing
- Time periods
The minimum age to apply for a reverse mortgage is 65 years, that is, having reached the retirement age, while the maximum is usually set at 90 years of age.
To know the financial value of the home and therefore establish an economic amount that the owner will receive for it, the bank must carry out an appraisal of the same.
Obviously, the older the client is and the more appraised the house receives, the greater the amount of money he receives for it with his reverse mortgage.
Within the deadlines there are the lifetime and temporary fees, that is, the owner can decide whether to receive this money until his death or set a deadline.
Before signing a reverse mortgage, you must be aware that the bank will charge interest, as is normally the case with other types of mortgages.
Therefore, once the homeowner dies, their heirs wish to recover it, they will have to return the money already borrowed and the interest generated by the mortgage.
It is very important to indicate that, although the owner signs a reverse mortgage, he does not lose the rights to the house, maintaining his ownership while he lives, as if it were a usufruct.
The owner will never cease to be the owner of the home and will not have to modify the deeds. In fact, as the home is yours, you can do with it what you want: live or not in it, rent it and even sell it. In the latter case, yes, before selling it you must have previously canceled the reverse mortgage.
The heirs will always have the right to keep the house (as long as they have paid the remaining debt to the bank) or to sell it (receiving then the amounts that are still to be received and are up to date with regard to the accumulated interest payments).
The main advantage of reverse mortgages for those who sign them is the fact of being able to reside in their home as they had done so far, without having to depend economically on anyone and also being able to do so in their home.
The only guarantee that the client needs to present is the house itself on which the reverse mortgage will be made. That means you do not have to invest any capital or give another alternative or additional economic signal.
In addition, it can be a practical way to have cash to make improvements or carry out some necessary housing reform, since between 10% and 15% of these extra expenses can also be added to the economic amounts granted by the Bank with the reverse mortgage.
Unlike the rest of the mortgages, in which repayment installments have to be returned month by month, with the reverse mortgages the client does not have the obligation to return the amounts received. Instead, you can return them voluntarily and freely if you decide so or after your death the bank and the heirs make a decision on the property.
Something that is also very tempting is that this type of operation has a unique tax advantage: it is not taxed and therefore it is not necessary to include the income it generates in the income statement.
This means that no taxes are paid for having a reverse mortgage, unless deferred annuity insurance is made effective (it is one of the modalities existing in reverse mortgages), in which case it will be necessary to declare those amounts, but in a very small percentage.
But in reverse mortgages, not all are benefits. There are also some inconveniences that can make us doubt whether we find it profitable or not in our situation.
And it is that signing a reverse mortgage also has associated a series of notary expenses, management, opening commission, and for obtaining documents, such as home appraisal or a series of taxes, so you can also generate a good number of expenses that we did not have a priori.
In the case of the opening commission, this point can be negotiated with the bank to terminate it, but it is each banking entity that sets a series of requirements and particular economic interests.
Another aspect that must be taken into account is that, after some time, it is possible that the house will be devalued or simply lower the general price of these real estate, but that the loan will remain the same. This would harm the heirs who intended to recover the home because they would have to pay a price according to the mortgage and not at their current value.
Requirements to request it
As we have already indicated above, not all people can apply for a reverse mortgage.
First of all we have the age limit: only people who have already turned 65 can do so, although there are some exceptions, such as in cases of people with dependency in grade 2 and grade 3, called severe dependence and great dependence, respectively.
An additional limit is that which has to do with the maximum age, because although the average is around 90 years, it is each entity specifically that has the power to delimit it according to its criteria.
The house on which the mortgage is to be made and therefore the prior appraisal must be in the name of the client, and therefore, must be its legal owner.
Another essential requirement is that the house is totally free of charges, that is, that it does not weigh any other mortgage on it and if there is one, it is an indispensable requirement to cancel it before requesting the reverse mortgage.
It does not matter if the home to be used as a guarantee is the usual one or a second home, but by doing so on the first, we will save the payment of the Tax of Documented Legal Acts.
On this point it has been very recently that the Supreme Court has ruled that it should be the bank and not the client who is responsible for these expenses, something that is not yet fully defined.
On the other hand, although it is not an essential condition, it is true that banks have a preference for homes that have a high value and therefore over which they can obtain higher economic returns.
Those who meet the above requirements (age, home ownership and no charges), should also be informed about the so-called Life Annuity Insurance.
It is not a requirement to contract a reverse mortgage, but it is a very relevant factor also related to its performance and functionality.
The Life Annuity Insurance is a proposal made by some banks to complement the reverse mortgages in the event that the client lives longer than the one considered by the calculation of the life expectancy that was made when the fees he was going to receive were estimated monthly.
This means that there are times when the client lives longer than expected and therefore, there comes a time when the monthly payments of money he was receiving for the reverse mortgage are exhausted.
That is when the Life Annuity Insurance operates (as long as it has been contracted when signing the reverse mortgage).
Thanks to this type of insurance, the holder of the same will receive from that moment (when the amounts for the reverse mortgage end) a rent periodically until he dies.
This savings product, of course, is not free, and it implies an additional cost for the client, who has to contribute capital, thus increasing his expenses but becoming a very useful complement to integrate into the reverse mortgage.
That is why there are many retirees who prefer to secure a future without frights even though they end up receiving a lower financial remuneration periodically, but with the certainty and carelessness of knowing that until their death they will be able to sustain themselves financially.