Retirement is the goal and, when you reach it, you should do it in the best possible conditions, both health and economic. With the public pension system secured with pins, it is advisable to have a plan B that guarantees stable monthly income during your retirement. The reverse mortgage is an option to get it .
Regulated by Law 41/2007, of December 7, on the Regulation of the Mortgage Market, the reverse mortgage is a financial product whose purpose is to convert the value of a home into a monthly income , which makes it a very interesting formula for complement the public pension.
What is a reverse mortgage?
In practice, a reverse mortgage consists of a mortgage loan for people over 65 according to which a financial institution pays a person a monthly amount in exchange for their home as collateral. Its operation is just the opposite of a traditional mortgage: the mortgaged person does not pay monthly fees to the bank to buy the house, but it is the bank that grants the owner a loan in exchange for his home as collateral.
Therefore, there are two differentiating characteristics between the reverse mortgage and the conventional mortgage: the first is that instead of reducing the debt over time, it is increasing; and the second is that the loan amount is not received in full, but in monthly installments.
It must be clear that the home does not change ownership: the owner of the same remains the person who signs the credit , so you can continue living in your home and living normal life. The only thing that happens is that this house works as collateral against the bank to obtain the loan.
The requirements to access a reverse mortgage are very simple. It is enough to be over 65 years old and have a home on property, although there are exceptions regarding age in cases of dependency or disability. In order to calculate the amount of the mortgage, the life expectancy of the mortgaged person is estimated downwards with the objective that at the time of death the value of the house is greater than the value of the debt.
Who pays the debt?
Logically, the loan ends when the owner of the house dies and his heirs will be those who face the repayment.
Three are the options of the heirs when the owner of the house dies:
1st. Settle the debt with cash or sign a mortgage with the bank to keep the house.
2nd. Sell the house and allocate the money obtained to settle the debt with the bank (as explained above, the value of the house will always be greater than the debt).
3rd. Renounce the home so as not to pay the debt and keep the bank with it.
Disadvantages of the reverse mortgage
As we can see, the reverse mortgage is a financial product designed to complement pensions, although it is still a debt that someone must pay off before or after , in this case the heirs. If nobody pays it, the bank stays the house. As the saying goes: banking always wins.
On the other hand, its complexity is such that it may not be aimed at all types of audiences. In addition, it should be borne in mind that normally it is only granted to homes with a high value and that the risk that the value of the house decreases will always be present.