An inverse mortgage allows someone to make a mortgage for a property in exchange for receiving a monthly income.
The idea behind this financial program is that old people can get an extra amount for their expenses while they are still alive. Once they die, the financial institution will become the owner of the property.
It can be an interesting option for those that have economic issues and want to assure an income to cover them. However, it also has its downsides.
In Spain, inverse mortgages are regulated under the Ley 41/2007, de 7 de diciembre. This states that the beneficiaries should be at least 65-years-old or have a disability of 33% (Spanish doctors certificate that) or more. It is also ensured that the financial institution only can claim the debt after the death of the beneficiaries.
The heirs have the chance to recover the property by paying the debt plus the accrued interests. The financial institution will not be entitled to ask any additional compensation for this.
Pros of Inverse Mortgages
The main benefit of an inverse mortgage is if someone needs the money while they are alive, and if what happens to the property after they die is not a concern. An inverse mortgage allows someone to have more money available in old age when other income sources usually get smaller and costs like caregiving and health usually increase.
Another benefit is the fact that an inverse mortgage is a loan means that the money received is not taxable in as an income, so there are no taxes involved.
Thirdly, you can continue using the property, so it is possible to ask for an inverse mortgage and then rent the property or continue living on it.
Lastly, the heirs will have the right to recover the property.
Cons of Inverse Mortgages
An inverse mortgage has important disadvantages, the main one being the high interest you will need to pay to recover the property.
Another disadvantage is that the heirs will need to pay the debt back if they want to keep the property. Besides, the value of the property can go down with time. If this happens, the heirs could face a situation in which they have to pay more for the property than its value, which sometimes they will do due to its sentimental value.
The income from the inverse mortgage does not raise with inflation, so it can become almost useless with time. Alternatively, if you opt for renting the property you could try to review the rental price.
Lastly, financial institutions can be conservative with this product, and they usually only accept properties of a great value.
It is good to know that this option exists and to consider it. However, we advise our users to check out other alternatives, including selling the property or renting it out, before making a decision.
Spanish consumers had interest in inverse mortgages when they first appeared, but after a few years they lost it, and now this not a very common thing.
If you are considering undertaking an inverse mortgage, it is very important that you get independent advice. It is a complicated financial product and you need to understand it and its consequences fully before signing anything.