Reverse mortgage: a tool to be discovered
Let’s talk about reverse mortgage, taking a cue from the current economic situation which, as we well know, has been considerably damaged by the SARS-CoV-2 pandemic. More and more people are finding themselves in a vulnerable condition.
This context particularly affects the over-sixties, who need more liquidity due to the increasingly aged society and the decline in pension values. It is more difficult for the elderly to access credit, due to the problem of demonstrating the sustainability of the loan they wish to obtain.
Not everybody knows, but for some time, in order to cope with this need, a form of funding has been available to obtain liquidity: the reverse mortgage, devoted specifically to the over-60s.
This form of financing was developed in the Anglo-Saxon world, and is known as:
- mortgage life loan,
- lifetime mortgage,
- equity release or reverse mortgage.
The requirements for accessing a reverse mortgage
The indispensable requirements are:
- aged over 60
- Owned residential property
If the person is married or has lived with a partner for more than 5 years in the mortgaged property, the partner, who must also be aged at least 60, must approve the loan. Meeting these requirements does not automatically assure the right to a reverse mortgage, but the lender will independently assess whether or not to grant the loan.
The parties with the right to grant a lifetime mortgage are banks and financial brokers. The loan is long-term and is based on a first-rank mortgage on the applicant’s property. The mortgage is recorded in the property register by notarial deed.
How much is the loan
The amount of the reverse mortgage may vary from 15% to 50% of the total value of the mortgaged property. The value of the property is set by a surveyor appointed or approved by the financing party. After signing the loan, no modification may be made to the mortgaged asset. The older the applicant, the more willing financial brokers are to grant larger loans.
The specific feature of this type of mortgage is that the debt is repaid all or in part after the death of the borrower.
Types of reverse mortgage and extinction
There are 3 different types of reverse mortgage:
- Standard: a single disbursement on signature of the contract without repayment installments. The whole capital amount and all interests matured are paid by the heirs in a single installment.
- Gradual disbursement: disbursement at agreed intervals without repayment installments. The whole capital amount and all interests matured are paid by the heirs in a single installment in the same way as the standard.
- Interest-only: repayment installments only of the interest, while the capital amount is paid by the heirs in a single installment.
The debt must be repaid in a single installment within 10 – 12 months following the death of the mortgage holders (single article of Italian Law no. 44 of April 2, 2015, in force from May 6, 2015, amending paragraphs 12 and following of article 11-(14) of Italian Decree Law no. 203 of September 30, 2005, converted by Italian Law no. 248 of December 2, 2005). Amending the paragraphs in 2015, the legislator aimed to make the mortgage application process more feasible, in particular by lowering the age of the applicants from 65 to 60.
The heirs have the possibility either to sell the mortgaged property and repay the loan with the revenue from the sale, or alternatively repay the amount with their own money in order to extinguish the mortgage on the property. If there are no heirs, or the heirs do not extinguish the debt within the deadline, the bank will have the faculty to place the asset on the market and, if a higher amount than the loan is obtained, the difference is paid to the heirs.
In some cases, there is an obligation to repay the full amount in a single installment prior to the death of the borrowers:
- The owner sells all or part of the property while still alive;
- The person taking out the loan establishes real rights, rights of use or collateral rights to third parties.
Reverse mortgage: advantages and disadvantages
The greatest advantages of reverse mortgage:
- The borrower has no repayment installments;
- To extinguish the debt an amount higher than the value of the mortgaged asset cannot be demanded;
- If the sale of the property generates a capital higher than the debt, this is distributed to the heirs;
- This funding model allows people to live in their own property without losing ownership thereof.
Disadvantages of reverse mortgage:
- It is not possible to make changes to the property after the signature of the loan;
- It is not possible to sell the asset;
- The property must be kept in good condition. A certificate must be issued annually by a surveyor confirming the good condition of the property;
- The property cannot be leased or rented.
Reverse mortgage can be a valid substitute for the sale of the bare ownership of the asset. This instrument monetizes part of the value of the home while allowing you to continue to use it.
Article by Francesco Londero, Asset Management Team, Morning Capital.
Sources and for further information