Do you know how a reverse mortgage works?

28/11/2023

Some banks are again offering their older customers reverse mortgages as a borrowing option. It’s becoming common to see adverts for this kind of product in the media. Do you know how they work?

A reverse mortgage offers over-65s access to liquidity via the equity built up in an unencumbered property without having to sell or leave their home. It works in the opposite way of a usual mortgage – hence the name. Instead of paying the bank back, the bank provides the homeowner with the property’s value in (typically monthly) instalments.

After their passing, the heirs can choose to retain ownership of the property and take over the debt. Should they choose not to do so, the bank will proceed with the foreclosure of the mortgage guarantee, thereby recovering the funds initially provided.

Requirements

• The applicant and any beneficiaries they designate must be at least 65 years old, be classified as dependants or have a recognised level of disability of 33% or more.
• The debt can only be claimed — and the property foreclosed — upon the borrower’s passing or, if specified in the contract, upon that of the last beneficiary.
• The mortgaged property must be appraised and insured against damage.
• The bank may agree with the customer to arrange for a lifetime annuity as part of the reverse mortgage.

Necessary steps

• The bank must provide the customer, free of charge, with clear and sufficient information about the loans on offer through the precontractual information sheet Abre en ventana nuevafor reverse mortgages.
• Once the bank has information on the customer's financing needs, financial standing and preferences, it must provide a personalised information sheetAbre en ventana nueva for reverse mortgages, with personalised information that allows the customer to compare its offer against other options available on the market.
• At the customer’s request, the bank must make a binding offer and provide the customer with advice from qualified professionals that will help them to understand the implications of a reverse mortgage.

Who can grant a reverse mortgage?

Credit institutions, specialised lending institutions and insurance companies can all market this product. Financial intermediariesAbre en ventana nueva may also play a role alongside banks to offer information and advice and aid in handling the operation.

A reverse mortgage is a complex product. Prior to signing, it is important to properly consider the terms and conditions. If you are looking into taking out a reverse mortgage, don’t hesitate to ask about anything you don’t understand and make sure you know exactly how it works and what implications it has. As with any financial product, never commit yourself to anything you don’t fully understand.