Reverse mortgage: what is it and what is the fine print?

When we name the word mortgage, the first thing that comes to mind is the money that a financial institution lends us to obtain the necessary financing for a purchase, usually a home, garage, storage room, local. There are various types, and also, we can find ourselves with a mortgage loan in which it is the bank that pays the beneficiary an amount of money and not the other way around. At least for a while. It is what is known as a reverse mortgage or reverses mortgage. These have requirements and peculiarities, so not everyone can access them. We will show you all the details in this post.

What is the reverse mortgage?

The Bank of Spain defines the reverse mortgage as: “a type of mortgage loan aimed at people over 65 years of age or dependents who own a home. Contrary to conventional mortgages, the owner receives an amount from the bank in exchange for the flat (generally in the form of the monthly rent). In addition to not losing ownership of his home, he will continue using it until his death.

That is to say. It is a financial operation with which the possibility of converting the equity value represented by the ownership of a home into money is given. An asset such as a flat is transformed into a financial or life annuity, and many people do it to complete the retirement pension.

One of the characteristics is that the interests of these mortgages are of an increasing type, in such a way that the more years you live, the more the applicable interest rate increases each year.

Requirements to be able to acquire it

As we have seen, this type of mortgage cannot be accessed by everyone since there are special requirements to be able to subscribe to it:

  • Having a home
  • Being over 65 years old.
  • Those under 65 who have a recognized disability of a degree equal to or greater than 33% may also do so.
  • Or people who are in a situation of severe dependency or significant dependency.
  • The amount of the credit may not exceed the home’s appraised value. For this, it has to be appraised by an appraisal company.
  • It can be contracted with a credit institution or insurance entities authorized to operate in Spain.

The subscription of a mortgage of this type is not incompatible with renting the house if desired. This option allows the client to obtain an income for the rental and what they already receive from the reverse mortgage.

In addition, it can be combined with life annuity insurance. Thus, if the person lives more than the monthly payments for this mortgage cover, he does not stop receiving the amounts.

Do you have tax benefits?

Subscribing a reverse mortgage will allow you to have some tax benefits. The most important is the one referred to as the Income Tax on Individuals (IRPF). In this sense, the monthly payments (or the single payment) received for this financial product are not required to pay said tax. So from the amount you receive, you will not have to pay your income tax.

Can an early expiration be given?

Let us remember that a clause of this type in a mortgage contract is one by which the financial institution can execute the mortgage loan if certain circumstances occur.

In these loans, if the owner decides to transfer the home (donate it or sell it, for example), the bank will have the right to demand the amount owed plus interest.

Because this type of loan is directly associated with a person with specific characteristics (age and life expectancy), it is impossible to subrogate it to someone with other circumstances.

What happens when the beneficiary of a reverse mortgage dies?

Ownership of the home remains with the reverse mortgage client until their death. When this happens, or if there is more than one beneficiary and the last one dies, several situations can arise since the heirs of the property would inherit it with the subscribed debt:

  • The heirs settle the debt with the financial entity by paying off the mortgage loan entirely with their funds. They have to pay both the amount received by the deceased and the interest generated.
  • They can also cancel it by acquiring another credit to cover said debt.
  • In the third case, they can sell the house and thus satisfy the debt incurred.

In no case the entity with which the reverse mortgage was subscribed can charge the heirs any expense or commission for canceling the debt.

Who assumes the costs of formalizing a reverse mortgage?

Following the new Mortgage Law publication, who is responsible for covering each mortgage expense is strictly assessed. However, previously these expenses have been borne in most cases by the consumers who subscribed to the loan.

By Cary Grant

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