Reverse mortgage and reverse rent: how to reinforce the pension with housing

Several formulas today allow older people to monetize their home to supplement their pension, but all of them they have their lights and shadows. With 78.7% of wealth assigned to this type of asset, according to data from the Bank of Spain, most of the money of Spaniards is literally stuck between bricks. This real estate heritage can be translated into liquidity with products such as reverse mortgages, reverse rentals and bare ownership, which offer income in exchange for the property as guarantee.

These are still residual alternatives in Spain, but they are gaining advertising weight in recent times due to the aging of the population. The reverse mortgage seems to be arousing greater interest in the growing supply. Until the third quarter of 2022, 317 operations have been closed compared to 197 in all of 2021, 111 in 2020 as a whole or 149 in 2019, according to data from the General Council of Notaries.

The reverse mortgage is a product designed for people over 65 (or severely dependent) owners of their main residence and who want to get extra money in your retirement. It works contrary to a traditional credit, since it is the bank that pays the owner of the house, as long as he does not have charges, while maintaining the property and the residence. You can choose between a single subscription, a lifetime monthly income Or a combination of both. After death, the heirs decide whether to return the loan or give up the property. Most choose to sell the home to pay off the accumulated debt, since interest generally makes it high.

It is usually linked to a income insurance which is activated at the moment in which the installment received by the holder exceeds the maximum value of the mortgage. That is, when the income received has already exceeded the value at which the home was appraised.

The amount of the loan varies depending on age and the location of the home given as guarantee is also taken into account. If the house is valued at 300,000 euros, 100,000 euros can be obtained, they point out from the independent consultant Óptima Mayores, which indicate that on average 30% of the appraisal value is provided, although it can reach 45%. “The higher the value of the home, the higher the amount of the operation. In the same way, the older the applicant, the greater the amount to be granted, since life expectancy would be lower and, therefore, the risk of longevity for the financial institution would be lower”, points out a document from the Foundation for Applied Economics Studies (Fedea).

Generally, reverse mortgages are marketed insurers or specialized companies in these products such as Caser, Grupo Retiro or the aforementioned Óptima Mayores, which ensures that since the end of 2019 the offer has grown and operations are expected to almost double in 2023. Caser, for example, has marketing agreements with Mas Vida and mortgage platforms like Helloteca or Finteca. Few entities offer this product. For now, Caja de Ingenieros, while since last October Santander Bank announces on its website that it will soon offer a reverse mortgage, but without giving dates. Sources from the entity assure that “it is very important that it be a product that customers understand 100%” and that they expect high demand.

The interest rates of this product range between 5% and 7%, this means that when you want to cancel the debt, you have to pay what the entity that contracted it has delivered plus this extra money. In the case of the aforementioned home valued at 300,000 euros that gives the right to a reverse mortgage of about 100,000, each year interest would be paid between about 5,000 and about 7,000 euros, depending on the interest rate. If the reverse mortgage was signed for 25 years, the total debt would exceed 200,000 euros.

Legally, this figure has the particularity that the regulations require independent advice, to avoid situations of abuse. Likewise, the amounts received are not taxed in personal income tax. Abel Marín, lawyer and partner at Marín Mateo Abogados, affirms that “it is a way of obtaining liquidity, but the main drawback of this type of loan is for heirs of the property, which may be forced to have to give up the inheritance or have to face a mortgage”. From HelpMyCash they maintain that the operation makes sense only if the home is of high value.

reverse rent

Reverse renting is a way of obtaining financing by offering the home for your lease without losing the property, but its free use. It is a loan that is repaid with the rent paid by a tenant who lives in the house to which the product is applied.

The company that offers it agrees to pay the owner of the house an amount of money in exchange for ceding the management of the property to rent it for a variable term (maximum of 10 years) that will depend on how long it takes the company to recover that money. borrowed plus interest. The company is paying off the debt, even though the borrower is already deceased. Thus, the main drawback is that the heirs cannot freely enjoy the home until you have paid off the loan in full.

It is a product limited to some very specific assumptions. It was born with the idea of ​​serving elderly people with a degree of dependency who need care in private residences and they cannot afford the expenses. Thus, it is necessary to have some degree of dependency or be in the process of requesting it. Since they will live in the residence because they need care, it is a way of making a profit from a house that will remain empty. In addition, this modality allows you to pocket more than what would be charged for a normal rental and to be able to face the fees of more expensive residences.

The interest rate applied for the money advanced, and which will remain fixed throughout the contract, is that of consumer credit minus 0.5%. To calculate it, the last three data available from the Bank of Spain are used. Currently, interest is around 6.5%.

Pensium has been offering this service since 2016. If the property needs reform, the firm takes care of the costs by adding them to the total amount of the debt. Every six months, they advance payments that, they say, can reach up to double the rental fee. The agreement is valid for a maximum of 10 years.

In the General State Budget of 2023, a series of bonuses for those who contract this product. Specifically, an exemption from payment of the Tax on Transmissions and Documented Legal Acts was established, which can range between 0.75% and 1.5%, and a 50% bonus in the application of notarial fees, as well as such as a 90% reduction in registration expenses. Pensium details that the credit contributions are not income attributable to personal income tax. “However, the rental yield must be considered as income from real estate capital in the personal income tax,” they point out.

Antonio Luis Gallardo, economist in charge of Asufin’s study area, points out that, although the reverse mortgage makes sense when the value of the property is very high, the reverse rent broadens the range to homes with a lower value. According to the expert, the limited supply of these products in Spain is felt in the conditions. “Interest rates are worse. The increase in debt is exponentially higher. This must be taken into account when comparing. In a 20-year survival, half an interest rate point is a very big difference between what is going to be received and what is going to be paid, ”he warns.

bare ownership

On the other hand, nuda propiedad is how the sale of home ownership is known. without giving up the lifetime usufruct. In other words, selling the property without ceasing to live in it until the moment of death, at which time the property becomes completely free to use by the bare owner.

Older people without direct heirs usually resort to this proposal, since the property is lost. The value of the operation is also closely linked to age and is usually between 20% and 50% below the market value.

As far as taxation is concerned, from the point of view of the buyer, the real estate must be included in the income statement, but when it is detailed that it is a bare property, it does not generate taxation since possession of the property is not yet held. The person who has the usufruct is the one who must pay taxes for it.