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Financial Dictionary - Reverse mortgage

Reverse mortgage

A reverse mortgage is a financial product in which a bank pays its customer a monthly income in exchange for them offering their home as collateral. It is a way of supplementing income in retirement.

The main difference with traditional mortgages is that the customer requesting a reverse mortgage does not have to return the amount borrowed. Instead, the corresponding amount will be repaid by the heirs. The heirs must decide whether to sell the property to pay off the debt. If they cannot pay the debt, they will need to take out a mortgage to do so.

What are the requirements?

  • Age

    Although it depends on the bank that offers the product, in general they are intended for people over 65 years of age and normally up to a limit of around 70 years of age. In case of dependency, these age limits may vary.
  • Ownership of the home

    It is necessary to be the owner of the property that will be offered as collateral. If it is also the habitual residence, it will be exempt from the stamp duty.
  • It is not compatible with having a mortgage loan

    In order to subscribe a reverse mortgage it is necessary to cancel the mortgage loan, if we have one. If this occurs, it is a common practice for financial institutions to advance the principal so the existing mortgage can be cancelled before the reverse mortgage is signed.
  • Various borrowers

    The reverse mortgage can be taken out by more than one borrower. This is typical in the case of married couples.

How much is the income received?

The amount received will vary depending on the following factors:

  • The age of the person taking out the mortgage
  • The value of the home
  • The type of reverse mortgage taken out:

    • Reverse mortgage for specified period: this type pays income, equivalent to the total value of the home, to the subscriber over a negotiated period. This is the most common type for subscribers of more advanced age.
    • Lifetime reverse mortgage: In this type, the person taking out the mortgage receives a monthly income for life. This amount will always be less than fixed-time income.
    • Single payment reverse mortgage: in this case, the person taking out the mortgage receives a single payment for the amount of the home's appraisal value.

How can I cancel a reverse mortgage?

A reverse mortgage can be cancelled whenever the person who has taken it out wishes. To cancel a reverse mortgage, it is necessary to return the full amount received up to that moment, the initial expenses paid by the financial institution and the interest that has been generated up to the moment of cancellation.