Why can't I get a mortgage?
Reverse mortgage and annuity: Live rent-free in your own house before
Reverse Mortgage, Life, Real Estate, Endorsement, Reverse Mortgage - there are many names for this product. The idea behind it: Either property owners sell their property or they borrow money.
In both cases they can still live there. Depending on the financing model, the owner receives a one-off payment, a temporary or a lifelong pension - and lives rent-free in his property until the end of his life. The property only becomes the property of the buyer (for example, a credit institute or insurance company) after his death, but possibly also when moving into a retirement home. Or the loan resulting from the reverse mortgage is repaid by selling the property.
What are the benefits of a reverse mortgage?
Owners can stay in their own four walls for the rest of their lives, but still get money for their property during their lifetime. The payout is tax-free and there are no interest or repayments during your lifetime. The reverse mortgage enables planning security, as all important factors - for example the amount of the pension / one-off payment, interest rate, term - are determined in advance. In most cases, it is possible to sell the property - for example in the case of care. The loan is then repaid from the sales proceeds.
If a bank offers you a loan that requires interest and / or repayment of current income to be paid during your lifetime, it is not a reverse mortgage, but a "normal" loan, in which the property is probably simply used as collateral .
What are the disadvantages of a reverse mortgage?
The reverse mortgage is a relatively expensive product. This affects both the interest rate on the loan and the fees incurred. These include, for example, the transaction fee and the bank's reinsurance against the risk of a long life - i.e. if the owner lives longer than statistically calculated. The property serves as collateral for the reverse mortgage and can no longer be used as collateral for any other purpose. It reduces the hereditary mass. Anyone interested in a reverse mortgage should definitely clarify who will have to pay for maintenance costs and renovations in the future.
How much money can you expect for your property?
Of course, that depends on many factors, such as the condition and location of the property or the offer from the respective provider. The following example gives an approximate order of magnitude:
Suppose you have a property that is worth $ 200,000 today. The provider applies a risk discount of 25 percent. Thus, a loan amount of 150,000 euros is available. However, you do not get paid out 150,000 euros, but the loan at the end of the term must not be more than 150,000 euros. If the term of the loan is 19 years, at an interest rate of 6 percent, a sum of almost 50,000 euros is available as a one-off payment or around 340 euros in monthly annuity.
Note that this invoice does not include any fees. The different fees mean that the amount available to you is less. For example, the one-time payment can be reduced to 45,000 euros or the monthly pension to 250 euros.
Who is the reverse mortgage for?
Whether a consumer reverse mortgage is a suitable product cannot be answered with a general yes or no. It is a conceivable alternative for a very specific group of people.
Basically, the mortgage is an option for people who
- are already retired or are about to retire,
- own a largely debt-free property,
- want to stay in this property,
- have no related heirs and
- would like to have more liquidity without having to bridge a financial bottleneck.
When considering the above example, two consumers with the same starting situation can come to very different results:
"The reverse mortgage is very interesting for me because I receive almost 50,000 euros in total - money that I would not otherwise get. I have no close heirs or I still inherit enough without the property."
"The reverse mortgage is not of interest to me because I only receive just under 50,000 euros, but in the end I have to repay 150,000 euros. This reduces what I bequeath to my loved ones by 100,000 euros."
What are the differences between reverse mortgage and annuity?
Both reverse mortgage and annuity have the common core that the previous owner stays in his property until the end of his life without having to pay rent and receives money for the property during his lifetime. While a one-off payment, a temporary annuity and a lifelong annuity are basically possible with the reverse mortgage, the life annuity is about a recurring payment; a one-off payment should not be provided by definition. In practice, however, a one-off payment can also become part of the contract - for example if the property still has a residual debt and the previous owner needs capital to fully discharge the debt.
There are significant legal differences between a reverse mortgage and an annuity. The reverse mortgage is ultimately a loan agreement that does not change ownership when signed. Unless otherwise contractually agreed, the previous owner continues to bear the costs for necessary renovations. The property serves as security for the lender, which is usually entered in the land register via a land charge. After the death of the owner, the loan is either repaid by selling the property or the property becomes the property of the lender.
It is different with the annuity: Here, when you sign it, there is a sale and thus a change of ownership. The rights of the previous owner, such as rent-free right to live until the end of life, are entered in the land register. Unless otherwise contractually agreed, the new owner is responsible for renovations.
In principle, it cannot be said whether a reverse mortgage or an annuity is more advantageous. It depends on the individual case - and on the question of whether and how many offers there are in practice for the property in question. Because reverse mortgage and annuity have not yet caught on in Germany, we have to wait and see how things develop further.
What alternatives are there to reverse mortgages and annuities?
Anyone who has distributed their assets across different product types should check whether the desired additional liquidity can not be achieved better in other ways than with the relatively expensive reverse mortgage. Anyone who has no significant assets other than their own property should ask themselves whether a sale is perhaps the better alternative.
It would be a bad scenario if the reverse mortgage or annuity helps out of today's financial bottleneck, but a few years later the sale is pending and the property is either encumbered by the expensive reverse mortgage or the property is no longer at all with the annuity belongs.
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