A short guide of how the Reverse Mortgage works in Spain
The steady growing of the real estate market in Spain since 2013 has shown a recently published +5 % as average rate nationwide.
Like in other south-Mediterranean countries, Spain has become a country of residence for many European retirees, who choose a warm whether, good infrastructure and social services for spending the rest of their lives. Life expectancy is, in parallel, becoming longer and no few pensioners find that the increased value of their houses don’t have a daily positive impact in their family budgets, linked or depending on a stable pension scheme.
These are the typical cases where the reverse mortgage becomes an option, although not all foreign retirees that come to Spain are aware that these products (very common in the Anglo-Saxon countries) have their own local regulation in Spain.
In fact, Law 41/2007 introduced the first regulation of the reverse mortgages in a market where the product already was offered since years by financial entities and insurance companies.
Unlike a traditional loan secured by mortgage, a reverse mortgage grants a loan to the borrower and allows him to make monthly dispositions of the loan (for the rest of his life in the case of life reverse mortgages or for a limited period, if talking about ordinary reverse mortgages). In both cases, the extra monthly income becomes a practical way to collect the return of the value overprice of their homes.
How does the reverse mortgage work?
The owner of the house and borrower is granted a total amount as a loan, that will use in monthly payments for a number of years (or for life), while not subjecting the repayment of the loan until the death of the last beneficiary. At maturity, the heirs will decide whether to repay the loan in a certain period of time or to sell the house and cancel the loan.
How much money is borrowed?
The amount of the loan will depend on the age of the younger beneficiary (in case of couples) and on the value of the house. The appraisal of it is made by an official expert valuator registered before the Bank of Spain.
How can the borrower receive the payments?
Depending on the terms agreed, legally the borrower can receive monthly instalments, or make extraordinary dispositions of the outstanding balance.
What if the loan is fully disposed before the death of the beneficiary?
The maturity of the loan, and therefore the legal obligation to repay it, will be postponed until the death of the last beneficiary, regardless the years elapsed.
What are the disposition faculties of the borrower towards the house?
The borrower can, at any time, use the house or put it on lease to third parties, and receive the monthly rents for it as a complementary income to others.
Does the Spanish Legislation put any limits?
In order to benefit from the protection granted by the legal system about transparency and consumers protection, the reverse mortgage made with a registered institution could be made if:
- The beneficiary is owner of the house to be secured by mortgage
- Beneficiaries are older than 65
- Or, beneficiaries with a disability over 33% or in dependency situation
How effective is the consumers protection provided by the Spanish Legislation?
According to the Order issued by the Ministry of Finance in date 28 October 2011, the consumers of these products shall receive:
- A preliminary binding offer by the Reverse Mortgage’s grantor
- An independent and sufficient advice, equal to the one required for banking products
- The verification by the notary before signing the contract that the client received proper advice.
- The client can propose his own valuation of the house if he disagrees with the valuation made by the Lender, who is obliged to accept it if made by a registered valuation expert.
Reverse Mortgage, in one of their different approaches, together with other similar instruments (life rent, reverse mortgage combined with life insurance, etc) are good alternatives for many retirees who wish to receive the profits of the investments they made in their houses without loosing the property and the right to live in.
We strongly recommend to ask for a professional advice, and to consider your specific tax and legal situation before engaging a similar product.
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