Several formulas today allow older people to monetize their home to supplement their pension, but all of them They have their highlights and their shadows. With 78.7% of wealth attributed to this type of asset, most of Spaniards’ money is literally stuck between bricks, according to Bank of Spain data. This real estate legacy can be converted into liquidity with products such as reverse mortgages, reverse rents and bare ownership being offered Income in exchange for property as guarantee.
These are still residual alternatives in Spain, but have recently gained in advertising weight due to the aging of the population. the reverse mortgage seems to be of more interest growing supply. By the third quarter of 2022, 317 deals had been closed, compared to 197 for all of 2021, 111 for all of 2020 or 149 for 2019, according to data from the General Council of Notaries.
“More and more funds and investment companies are targeting retirement homes. This is the case with the Socimis, insurers or even banks, through numbers such as the reverse mortgage or buying the house from the owners to rent it out until they die or decide to leave it,” points out real estate consultant Eduardo Molet , who clarifies that these are financial solutions, “some more profitable than others”. It is useful to have a good understanding of the pros and cons of each of the options in order to avoid risks, especially for future heirs.
reverse mortgage
The reverse mortgage is a product for people over 65 (or heavily dependent) homeowners who want to make extra money in retirement. It works in contrast to a traditional loan as it is the bank that pays the home owner as long as they have no fees while retaining the ownership and residence. You have the choice between an individual 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 as interest rates generally make them high.
It is usually associated with a income insurance which is activated at the moment when the installment received by the holder exceeds the maximum value of the mortgage. That is, if the income received has already exceeded the value at which the house was estimated.
The amount of the loan varies according to age and the location of the guaranteed home is also taken into account. If the house has a value of 300,000 euros, 100,000 euros can be obtained, they point out to the independent consultant Óptima Mayores, who indicates that on average 30% of the appraised value is provided, although it can reach 45%. “The higher the value of the home, the higher the amount of the operation. Likewise, the older the applicant, the higher the amount to be granted, since life expectancy would be lower and thus the longevity risk for the financial institution would be lower,” says a document from the Fundación de Estudios de Economía Aplicada (Fedea).
In general, reverse mortgages are marketed insurers or specialized companies in these products such as Caser, Grupo Retiro or the already mentioned Óptima Mayores, which ensure that the offer has grown since the end of 2019 and the operation is expected to almost double in 2023. For example, Caser has marketing agreements with Mas Vida and mortgage platforms such as Helloteca or Finteca. Few companies offer this product. For now, Caja de Ingenieros, while since last October Santander bank announces on its website that it will soon be offering a reverse mortgage, but without giving dates. Company sources assure that “it is very important that it is a product that customers understand 100%” and that they expect demand to be high.
Interest rates on this product range from 5% to 7%, which means that if you want to cancel the debt, you have to pay what the principal delivered plus that extra money. In the case of the above $300,000 home, which qualifies for a reverse mortgage of about $100,000, interest would be paid between about $5,000 and about $7,000 per year, depending on the interest rate. If the reverse mortgage were taken out for 25 years, the total debt would exceed 200,000 euros.
Legally, this number has the special feature that the regulations require independent advice in order 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, confirms that “it is a way to get liquidity, but the main disadvantage of this type of loan is for Inherit of the property who may be forced to relinquish the inheritance or face a mortgage”. That’s what they claim from HelpMyCash the operation only makes sense if the apartment has a high value.
reverse rent
Reverse rental is a way to get financing by listing the home for you Lease without loss of ownership, 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 home an amount of money to lease the management of the property for a variable term (maximum 10 years) that depends on how long the company needs the borrowed money plus get interest back. The company pays off the debt even though the borrower is already deceased. So the main disadvantage is that the heirs cannot enjoy the house freely until you have paid off the loan in full.
It’s a product limited to some very specific assumptions. It was born with the idea of serving the elderly with some level of care needs care in private homes and they can’t afford the cost. Therefore, it is necessary to have some level of dependency or to be in the process of applying for it. Since they will be living in the residence because they need care, this is one way to capitalize on a vacant home. In addition, this modality allows you to pocket more than you would with a regular rental and bear the most expensive housing fees.
The interest rate on the advanced money, which remains fixed throughout the term of the contract, is that of consumer credit minus 0.5%. The last three available dates from the Banco de España are used for the calculation. The interest rate is currently around 6.5%.
Pensium has been offering this service since 2016. If the property needs renovation, the company will cover the cost by adding it to the total debt. Every six months, they make advance payments that can reach up to twice the rent. The agreement is valid for a maximum of 10 years.
In the General State Budget 2023 will be a number of bonuses for those who order this product. Specifically, an exemption from payment of the tax on transfers and notarized legal acts, which can range from 0.75% to 1.5%, and a 50% bonus in the application of notary fees and a 90% reduction in registration costs were established. Pensium states that the credit contributions are not income attributable to personal income tax. “However, the rental income must be taken into account in income tax as income from real estate assets,” they emphasize.
Antonio Luis Gallardo, senior economist for Asufin’s area of study, points out that while reverse mortgage makes sense when the property’s value is very high, reverse rent broadens the spectrum to lower-value homes. According to the expert, the limited supply of these products in Spain is reflected in the conditions. “Interest rates are worse. The increase in debt is exponentially higher. This must be taken into account when comparing. If you survive 20 years, half a point of interest is a very big difference between what is received and what is paid,” he warns.
mere property
On the other hand, nuda propiedad refers to the sale of residential property. without giving up the right of usufruct for life. In other words, selling the property without living in it until the time of death, at which time the property becomes completely free to use by the mere owner.
Elderly people without direct heirs usually resort to this suggestion as wealth is lost. The value of the operation is also closely linked to age and is usually between 20% and 50% below market value.
From a tax point of view, the property must be included in the income statement from the buyer’s point of view, but if it is stated that it is a mere property, no taxation arises as the possession of the property is not yet held. Whoever has the usufruct has to pay taxes on it.