What is a reverse mortgage?
The reverse mortgage is a way of supplementing income for those over the age of 65. It is a financial product for homeowners and allows them to obtain additional income to their pension without losing their property.
What are the advantages of the reverse mortgage?
Their home guarantees the loan, but unlike a standard mortgage, the homeowner doesn’t have to pay interest or repay any amounts received during the remainder of their lifetime. The reimbursement can be deferred upon the death of the Elderly Person who was contracted.
Are there any risks involved?
The main disadvantage lies with the Derivative Life Annuity Insurance contract, taken out to ensure the reverse mortgage money doesn’t run out.
If the homeowner chooses to take the income as a single payment, it cause the final cost to rise a lot.
By way of example: for a loan of 664,526 euros contracted in 2013 by an 85-year-old person and which would be activated when he turned 93, the single premium was 211,000 euros. (Finect)
The other thing to consider is the house may end up being worth less than the loan leaving the heirs to the property to pay off the loan.
Who can apply?
The criteria for application is that people need to be over the age of 65 and to be a homeowner. Where possible, the home should be free of any debts.
If there is an existing mortgage, it is possible the reverse mortgage loan could be negotiated to cover the outstanding mortgage.
A second home would also be valid, while preference is for the primary residence.
I have a mortgage on my house; can I still apply?
As we mentioned above, it is possible to enter into a contract with the bank that is already mortgaged – on the proviso, the existing mortgage is paid off.
For example, if 75,000 euros are outstanding on the current mortgage, this would be added to the valuation of the house, which becomes part of the reverse mortgage loan.
Read more: All you need to know about mortgage valuations in Spain
Does the home change ownership?
No.
The mortgaged home does not change ownership at any time. It continues to belong to the person who contracted the loan and can remain living in the property.
How much money can I get from a reverse mortgage contract?
The amount of cash released is linked to the home’s valuation and how you prefer the money to be paid out.
There are two ways you can receive income.
- A lump sum paid out all at once. Or,
- A monthly, quarterly or semi-annual payment.
Are there any tax advantages to a reverse mortgage
Yes.
You won’t have to pay tax on the reverse mortgage as the amount constitutes a loan, and therefore, the additional income is not subject to tax in the IRPF.
However, in a situation where the homeowner has taken out deferred annuity insurance to protect against the reverse mortgage income running out, it will be necessary to pay tax. The good thing is it is only 1.44% due to being a tax advantage.
Can I rent out my house and still have a reverse mortgage?
The homeowner remains in complete control of the house and can therefore do whatever they wish – rent out or even sell so long as the monies of the reverse mortgage are paid.
Read more: What to expect when renting a property in Spain
What are the costs involved in setting up a reverse mortgage?
There are various charges and expenses to be taken into consideration.
Bank charges: An interest rate on the money loaned to the homeowner. This is recovered at the time of the loan being settled. The longer the duration of the loan, the higher the interest rate.
AJD costs: This only applies if it is not the primary residence. i.e., a second home.
Other costs: Fees for the Notary, the Registry and for setting up the loan.
Appraisal of the home: This fee is paid at the time and usually amounts to around 400 euros.
Generally, to help the homeowner, the bank will allow the expenses to be advanced on account of the loan.
Can I pay off the reverse mortgage early?
Yes, it is possible to pay off the loan in total, and usually, there are no additional mortgage commission charges. The amount to be paid back will be the total value of the loan taken out, the costs for setting up the mortgage and the interest due.
What is the usual process for paying off the money?
In general, it falls to the heirs of the property to settle the outstanding loan.
The heirs have options to pay off the funds due.
- Keep the home by paying off the loan in full.
- Sell the home and pay off the debt.
- Sign a new mortgage and pay off the debt.
Most banks will allow up to a year for the loan to be repaid by the heir(s).
Conclusion
Reverse mortgages are a convenient way to increase the pension income and remain in your home.
However, seeking professional advice when securing a loan against your home is always advisable.
With Costaluz Lawyers by your side, you’re not alone.
We are already helping dozens of clients with mortgage issues. If you are considering a reverse mortgage loan, contact us for a free, no-obligation chat and let us guide you through the process safely and securely.
Maria Luisa Castro
