Designed for people over 65, the reverse mortgage is an option to supplement the income we receive from the retirement pension. This loan linked to the value of a home that we own allows us to obtain a monthly income from the bank until the death or cancellation of the credit, at which time the heirs can choose to recover the house.
Although the usual is this mortgage is signed by people over 65 years of age, other entities may determine as a requirement the age they consider appropriate. It is also indicated for people with severe dependency or great dependency with a home they own.
The bank will give us the option to collect in a single time, upon signing the loan, the entire value of the appraisal carried out by the bank, or to collect a monthly rent until that amount is exhausted. The older the person who subscribes the loan, the greater the amount they receive each month, since the forecast is that they will receive that income for fewer years.
As there is the possibility that we will live more years than the loan contemplates, banks offer, together with the reverse mortgage, deferred life annuity insurance, which allows the homeowner to continue collecting the monthly rent once the amount is exhausted valued. However, these insurances are usually expensive and the bank will ask us to advance it in full at the beginning of the loan.
Once the homeowner passes away, the bank offers his heirs to choose between two options, usually within one year: return the money consumed from the loan to recover the home or sell the property to pay off the debt. A third option, which the bank is less likely to grant to the heirs, is to collect the remainder of the loan and have the bank keep the house.
There is also the option of canceling the loan if we decide to do so at any given time, which in most banks does not carry a commission. In this case we will have to return to the entity the money that we have received, to which we will have to add the interests and the expenses of constitution of the mortgage.
Ideally, the home that we mortgage on a reverse loan should be free of charges; But if we have not finished paying the mortgage on our home, the bank will extend the reverse mortgage loan with the amount that remains to be paid on our loan.
Taxes and expenses associated with the reverse mortgage
If the property that we mortgage is our habitual residence, we will not have to pay the Tax on Documented Legal Acts. Yes, we will have to do it otherwise, but there is no impediment to signing a reverse mortgage for a second home.
As the income we receive from the reverse mortgage is not considered as income, as it is a credit, these amounts are not taxed in the Personal Income Tax (IRPF). But the money that we would collect from the life annuity insurance once the amount of the credit is exhausted is subject to personal income tax.
Along with taxes, other expenses associated with the reverse mortgage must be taken into account: those of notary, registration and the appraisal of the house necessary to make the loan.
Although the mortgaged person will not have to pay anything for the duration of the loan, the reverse mortgage is also subject to interest: those that the bank establishes for the money it pays. However, it will be the heirs who will have to face these interests if once the owner dies they wish to keep the house.
In the event that the heirs wish to pay the debt to recover the home, they must pay the bank the amount received by the owner in the time that the loan has been extended, the interest generated by that capital and the initial mortgage expenses. The longer the mortgage lasts, the higher the interest will also be.
Advantages and disadvantages of the reverse mortgage
The reverse mortgage is a solution to achieve liquidity in our property and thus complement the pension without having to sell or rent. So the owner does not lose title to the house and can continue to live in it until his death. In addition, the home will continue to be available to the heirs, if the time comes they want to pay the debt and keep it.
However, for the same reason, the heirs are faced with the decision, once the owner dies, of having to face a debt in order to inherit the house. In addition, the interests that they will have to pay with this type of mortgage are much higher than those of any conventional mortgage loan.
Along with this inconvenience, there is sometimes a disagreement among the mortgaged between the value of the property. And we cannot ignore that the life insurance that would guarantee us to continue collecting the rent once the capital is exhausted supposes a very high cost.