What is a Lifetime Mortgage / Hipoteca Inversa?
A reverse mortgage is a loan made to eligible clients over the age of 65 who own their own home outright, or have a small mortgage in comparison to the value of the property. It allows them to access the equity tied up in their home if they either want to raise a lump sum or increase their monthly income or a combination of both without giving up ownership of the property.
How does it work?
Unlike a normal mortgage, the reverse mortgage does not require the homeowner to make monthly repayments to the lender, quite the reverse, the lender will pay the homeowner a lump sum or a monthly amount to boost their income in retirement. The borrower will only pay interest on the proceeds received which are received without tax payable as the funds are already in the asset (the property), which has previously been taxed when the property was originally purchased. The outstanding loan balance is repaid either upon the death of the borrower or if the home is sold.
Differences between a Reverse Mortgage and Equity Release or Life time mortgage
The main difference is that with an equity release scheme a 1 off percentage of the value of the home is paid in the form of a lump sum to the homeowner as opposed to monthly payments to subsidise income. In other words, an annuity is bought with this lump sum and the monthly payments made to the homeowner from this annuity.
The reverse mortgage allows the homeowner to access a small lump sum as well as monthly income but importantly, there is no requirement for an annuity insurance to be purchased which can be expensive.
Annuity rates are also very unattractive in the low interest rate environment we currently find ourselves in.
Pro’s of a reverse mortgage
No change of ownership occurs and you remain as the title holder of the property.
The primary appeal is that homeowners have access to their equity without the requirement to make any monthly repayments. It allows them to increase their income in retirement or to borrow an amount to make home improvements, travel or fund an expense, or simply to enjoy life.
Any lump sum payment will be paid free of TAX and any income received will also be tax free and does not have to be declared in your annual Spanish income tax declaration.
Any lump sum or income received can be taken and used for any purpose, E.g. necessary reforms to the property or monetary gifts to family.
The debt accumulated over the life of the loan, under current regulations, can be used to mitigate any future inheritance tax liability your beneficiaries might have to pay Hacienda when they inherit your property.
Many people have chosen to invest into bricks and mortar rather than saving into private pensions so a reverse mortgage is designed so that your property can provide additional income / lump sum to increase your financial well-being in retirement.
All set up costs related to the Reverse Mortgage are regulated by mortgage law 41/2007 and it is worth noting that mortgage tax (impuesto actos juridicos documentados IAJD) is exempt on all reverse mortgages and notary costs are regulated by the afore mentioned law to ensure a low cost entry point for these mortgages to ensure the maximum uptake as possible.
The only fixed upfront costs to a potential reverse mortgage borrower is the cost for an independent ECO survey and the cost of any independent advice which is obligatory to be sought.
The Reverse Mortgage can be voluntarily cancelled in full or partially at any time.
The property can be rented out if you decide to no longer live in the property any more, E.g. clients move to assisted housing. Any rent received on your home can be used to pay for the cost of care.
Reverse mortgages are only offered by registered lenders or Insurance companies regulated by the bank of Spain.
As you keep ownership of the property, any increase in its value remains yours to keep and can be used to mitigate the interest cost of the mortgage in Spain taken.
You are still able to leave a legacy to your beneficiaries.
Upon death, the beneficiaries have 12 months to sell the property to try and obtain the maximum resale price as possible.
Reverse mortgage contracts are always signed in front of a Spanish notary and the mortgage will always have to be registered and authorise as compliant to law 41/2007 by the official at the land registry.
The debt increases slowly on a month by month basis in comparison to the value of your home.+
This is not an equity release scheme and therefore there is NO investment into stocks, shares or any other investment vehicle. There is no investment risk associated with this mortgage.
The interest rate calculated is always a Fixed rate and not variable.
Your fiscal status is not a factor when applying for this kind of mortgage unlike a traditional mortgage from your bank.
Con’s of a reverse mortgage
If the property is owned by more than one person, then both applicants must be 65 years or older.
Maximum lump sum loan available to release of 10% – 20% of the value of the property
Interest rates tend to be higher than normal mortgages, typically around 5%-6% annually
Upon death, the benefactor/s would be required to repay this loan from the inheritance or from the sale of the property within a 12 month period.
The amount outstanding could be quite substantial and leave the benefactor with little inheritance especially if the value of the asset has decreased in value for any reason. It is worth noting that under law 41/2007, your beneficiaries will never find themselves in a negative equity scenario.
All property ownership costs remain to be paid by the owner such as property taxes (IBI & refuse collection), community fees, home insurance & maintaining the property correctly, if not this could be deemed as a serious breach of contract and result in the property having to be repossessed.
Reverse mortgages are only available on properties located in municipalities with a high population of approximately 50.000 or more residents.
Rural or rustic properties are not considered.