If you are wondering What is a reverse mortgage, it may be because you have heard about this topic with some frequency lately. It is a completely legal figure that allows those who own a property to access a new source of liquidity, with more monthly income.
As insurance experts that we are in Euroteide Insurance, we recommend that you ensure your financial peace of mind for the future through savings products such as annuity. But if the time comes you need a little more money than you have saved, you can resort to this legal figure that we are going to explain to you in more detail.
What is a reverse mortgage
According to statistics from the General Council of Notaries, 2021 reverse mortgages were signed in 197. Although this figure was low, it represented a growth of 178% compared to 2020 data.
But the number of reverse mortgages in Spain has not stopped growing in recent years. If 2021 operations of this type were formalized in all of 197, in the first half of 2022, 238 were closed, which is a increase of more than 20% in just six months.
Although Spain is a country that has always opted more for property ownership than for renting, the incidence of reverse mortgages here is lower than in other European countries.
Basically, because until recently there was not much knowledge about this figure. But as it becomes popular, the number of people who decide to purchase this product grows.
The reverse mortgage implies that the owner of a property that is free of debt agree with a bank receive a monthly payment every month for life. In the future, when this person dies, the bank will keep the property. If there are heirs, they can decide whether to let the house pass directly into the hands of the bank, or if they return to the bank what it paid at the time to the owner of the house and thus acquire ownership of it.
This form of financing is especially designed for people over 65 years of age, who have liquidity problems. Thanks to her, they receive a monthly income, and can continue living in her house.
How a reverse mortgage works
If we talk about how the reverse mortgage works, it is as follows:
A person who owns a home on which there is no longer any debt, takes out a reverse mortgage with a bank.
The bank agrees to pay the owner of the property a monthly amount for life. In exchange for what, when that person dies, the banking entity acquires full ownership of the property, recover what was paid from the heirs of the deceased.
This is the basic formula, but there are other varieties. For example, the bank pays a higher initial amount and then monthly installments for a limited period of time.
To understand it better, let's look at a simple example of the most basic form of a reverse mortgage:
Pedro is a 72-year-old retiree who receives a pension of 900 euros and has lived for 40 years in a home that he owns, and which is fully paid for.
With the current situation, Pedro has problems making ends meet with just his pension, so he goes to a bank to take out a reverse mortgage. The bank, once the property has been valued, offers to pay you 500 euros per month for life. Meanwhile, Pedro has the right to live in his house with complete peace of mind.
After Pedro's death, his son and heir has two options. He can let the bank keep the house he has been paying for. Or he can return to the bank what the entity has paid to Pedro during his lifetime, and thus become the owner of what was his father's house.
For the purposes of taking out a reverse mortgage, It is immaterial whether the contracting party has heirs or not.. If there are none, the operation is even simpler for the bank, since after death it will have full ownership (bare ownership and possession) over the property.
Advantages and disadvantages of a reverse mortgage
As with all financial operations, to understand what a reverse mortgage is and assess whether it is a good option for a specific person, you must know its pros and cons.
Advantages of the reverse mortgage
- Access to cash. Its main advantage is that those who enter into a contract of this type can immediately access liquidity. Counting every month on an amount that will complement their public pension and allow them to satisfy their basic needs.
- There are no monthly payments. Unlike what happens in a typical mortgage loan, here the owner of the property does not have to assume any monthly payment. It is the bank that gives money to him.
- The holder has complete freedom when deciding what to do with the money. He can also dispose of the home and sell it to a third party. Although, if he does this, he must return to the bank the amount that it would have already paid him.
- Protection against devaluation. If the real estate market changes course and the value of the property falls, this does not affect the owner, who will continue to receive the monthly amount previously agreed upon.
Disadvantages of the reverse mortgage
- Associated costs. Like any banking operation, this may involve some commissions and expenses that are important to assess in advance.
- Decrease in inherited assets. Reverse mortgaging a home directly affects the heirs, who must decide in the future whether or not they want to recover the property.
- It involves a series of obligations. The owner assumes certain obligations, such as keeping the home in good condition and paying all taxes and expenses on the property.
Now that you know what a reverse mortgage is, you can assess whether this is a suitable option for you. In Euroteide Insurance We are experts in advising you on the reverse mortgage if you are interested and in facilitating the operation that best suits you with the best advantages. talk later? Looking for other ways to protect your financial freedom for the future? Let us help you find the best insurance for your peace of mind today and in the future.
