What is a reverse mortgage and how is it calculated?

For many retirees, obtaining additional income on top of their pension can mean an immediate improvement in their financial health. Although there are some drawbacks, reverse mortgages can solve this liquidity problem without compromising ownership of the home or the right to live in it. 

Key features of a reverse mortgage 

A reverse mortgage is a type of mortgage-backed loan that does not require the transfer of ownership of the home: it can be lived in and even rented out by its owner during the term of the mortgage. 

This tool allows older people to use part of their assets to increase their income in various ways. The reverse mortgage can be received as a lump sum, in monthly payments, or a combination of both. 

The main difference compared to a traditional mortgage is that reverse mortgages do not involve repayment installments: in other words, the loan does not have to be repaid each month, but rather upon the death of the mortgage holder or when they decide to cancel it. 

However, reverse mortgages also have some disadvantages, such as high interest rates, loss of purchasing power due to the income not being updated, and a reduction in the estate (the heirs will have to assume the debt if they wish to keep the property after the death of the mortgage holder). 

What are the requirements for applying for a reverse mortgage? 

To apply for a reverse mortgage, the following requirements must be met: 

• Be over 65 years of age or have a degree of disability equal to or greater than 33%. 
• The mortgaged property must be the primary residence and free of encumbrances (such as debts or mortgages). 
• There must be no more than a maximum number of owners (usually only two). 

In addition to these general conditions, banks may apply other specific requirements, such as a minimum property appraisal value, insurance, or the existence of heirs. 

Cancellation and settlement of reverse mortgages 

Reverse mortgages can be canceled at any time by the holder, generally without additional fees. What will be required is payment of the amounts received to date, as well as the initial costs and interest accrued during the term of the mortgage. 

In the event that the mortgage holder dies, their heirs will have the right to ownership of the property, but they will be responsible for the debt incurred. The situation is usually resolved using one of these three mechanisms: 

• Pay off the debt with your own funds. 
• Apply for a new (conventional) mortgage to cover the debt incurred. 
• Sell the property to pay off the debt and keep any surplus profit, if there is any.