They are a type of mortgage loan for home owners who are over 65 or require long-term care.
Unlike a conventional mortgage, in a reverse mortgage borrowers receive an amount of money from the bank in exchange for the property (usually in the form of monthly income). Apart from retaining the ownership of their property, borrowers can continue to use it until their death.
The amount of income to be received depends on several factors:
- The value of the property.
- The age of the mortgage applicants and of their spouse.
- Whether applicants choose to receive a lifetime annuity or income for a specific period of time.
Banks frequently offer the opportunity of taking out an annuity contract at the same time as a reverse mortgage in order to ensure that this supplementary income can be received until death, if so wished.
Banks which grant reverse mortgages cannot demand repayment until the borrowers or the last of the beneficiaries of this credit system die, as stipulated in the agreement.
When borrowers die, their heirs will own the property as well as the debt that has built up. They have two options:
- To keep the property. In this case they must settle the debt with the bank by repaying the money that was borrowed. If they do not have any assets, they can finance themselves by taking out an ordinary mortgage loan against the property for the amount of the debt.
- To sell the property. In this case, the funds raised from the sale will be used to pay off the debt of the borrowers of the reverse mortgage. Should this amount not be enough to pay off the outstanding debt, the bank may urge the heirs to sell other assets included in the estate.
In conclusion, reverse mortgages are an alternative for supplementing pension incomes. Since they constitute a loan, this additional monthly income is not subject to personal income tax.
To find out more about reverse mortgages, see our Reverse Mortgage Guide (in Spanish).
FREQUENTLY ASKED QUESTIONS
Rounding a mortgage interest rateRead answerabout
Rounding a mortgage interest rate
Can my bank service other debts with the money deposited to pay my mortgage instalment?Read answerabout
Can my bank service other debts with the money deposited to pay my mortgage instalment?