Reverse Mortgage: How do you use property for financial wellbeing?

Many people reach retirement age with a very low pension, which makes it difficult to maintain a normal rhythm of life in old age and cover the most essential expenses. Finding a source of additional funding becomes an urgent need. In this situation, a reverse mortgage is the solution to find financial peace of mind for retirement.

What is a reverse mortgage?

A reverse mortgage is a loan designed for people over the age of 65 that offers an annuity (financial annuity) to supplement public or private pensions, secured by ownership of a familiar home. When the beneficiary dies, the heirs have two options: to keep the property, making payments to the financial institution plus interest, or not to claim it, in which case the organisation will remain the owner of the property that gave the annuity. This product is not taxable by law.

In other words, a reverse mortgage is a mortgage loan that allows an organisation to make monthly payments to the homeowner in exchange for receiving the home as collateral. The homeowner retains ownership of the home and can repay the debt at any time at no additional cost to most financial institutions. If this does not happen, the heirs will have to take over the situation by either paying off the debt or transferring the property to the financial institution. The mortgage loan is subsidised by law, so entails a number of minimal costs for the client, who only has to pay for the valuation of the property.

Who is a reverse mortgage for?

Reverse mortgages are available to people over the age of 65, dependents who own their own property or those who can prove a disability equal to or greater than 33%. If there are two owners, payments will be made until the death of each person. This monthly amount is fixed for life. The financial institution that undertakes the reverse mortgage will pay the owner(s) of the property a certain amount each month. It all depends on the value of the property and the age of the applicants, obviously older people can receive more money.

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Terms and conditions of a reverse mortgage

Many people think that with a reverse mortgage, control of the house goes to the bank or financial organisation. This is a big misconception. As property owners, we retain full control of our home and can even rent it out. The only thing required is to provide the bank with a rental agreement to review to make sure it is not a lifetime lease and not tied to a minimum income. Essentially, the house remains ours and the bank only uses it as security against the money it pays us each month.

One of the most attractive aspects of a reverse mortgage is the favourable taxation: the money we receive is not subject to income tax. Taxes will only apply if the person lives longer than expected and the reverse mortgage is converted to annuity insurance payments. Even then, only 1.44% of the income received will be taxed.

Comparison of annuities and reverse mortgages

Introducing you to one of the major financial doubts faced by many people reaching retirement age. These are actually two equally effective products, but they are designed for a different audience. If you have no children or direct heirs to leave your assets to, a financial annuity may be an option as it usually represents a larger amount of monthly income and also avoids paying utilities and property taxes.

Income from a reverse mortgage may be lower, but it provides the certainty of continued ownership of the property and protects the children's assets from their parents' debts. The income calculation for both financial annuity and reverse mortgage depends on the value of the home and the client's life expectancy, taking into account their age and gender. In the case of a financial annuity, the value of the use of the house is also taken into account. Both products can be arranged for a fixed term or for life, depending on the needs of the client.

Role of heirs in reverse mortgages

A financial institution providing a reverse mortgage will never claim the debt until the death of the recipient, which means that it is the heirs who will have to take it on.
Reverse mortgages are designed so that when the time comes to pay it off, the amount owed will be much less than the actual value of the property. The heirs can therefore choose the best way to repay the debt: sell the property and repay with the proceeds, or pay it out of their own funds. They have a year to choose the best option, and in any case they can calculate that they will make a profit of 50% of the value of the property.

When the owner dies, the heirs receive both ownership of the property and responsibility for the debt to the financial institution. They have two options. The first is to leave the property, which requires them to repay the debt by returning the money they took out. If they don't have the equity to do this, they can take out a conventional mortgage on the house for the amount of the debt. The second way is to sell the house and use the proceeds to pay off the debt. If the sale of the house does not cover the full amount of the debt, the financial institution may require the sale of other assets of the inheritance.

Conclusion

A reverse mortgage is a powerful financial tool for people over the age of 65, providing additional income in retirement and allowing them to maintain their lifestyle. It provides financial stability and certainty for the future, while remaining an affordable and favourable option. With favourable taxation and retention of home ownership, a reverse mortgage can be the ideal solution for those who want to ensure a comfortable old age without losing assets.

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