This week, Banco Santander and Mapfre obtained authorization from the Government to create a subsidiary specialized in granting reverse mortgages, a financial product aimed at people over 65 years of age, to whom it lends money by putting their home, in which they can reside, as payment guarantee. until his death.
The reverse mortgage is reborn in Spain, more than a decade after its launch: the real estate crisis and various rulings that condemned banks for bad practices in their marketing caused banks to abandon them, and few firms offered them. However, the need for liquidity of many seniors who own their home but have an insufficient pension has caused the product to resurface, precisely at a time when the rise in interest rates penalizes its attractiveness.
According to the Council of Notaries, in 2022, 629 reverse mortgages were created in Spain, more than double the 276 signed in 2021. Few in a country in which 89% of those over 65 years of age own a home, and in which the average retirement pension for people over 85 years of age is 1,009 euros/month, and the widow's pension is 832 euros.
The reverse mortgage, furthermore, is not the only way that the elderly – or their families – have to obtain money from their homes: the sale of the bare property also increases, maintaining the usufruct of the property, as well as the transfer of the future rent of the property. the home in exchange for receiving monthly income as an advance.
“There is a certain cultural rejection of older people to get into debt,” says David Igual, director of operations at Pensium, a company that allows seniors to monetize housing by transferring their future rent, to justify the slow rollout of this product. “And also a great desire to preserve the heritage to leave an inheritance to the children.”
This perception, however, is changing. “Before, the reverse mortgage or the sale of the bare property seemed like dark matters. Today, however, our clients have as much information as we do,” says Marc Cucala, CEO of G4T, a group that includes the La Vostra Llar nursing homes and Vittalias, a company that buys bare ownership of homes.
The reverse mortgage can give its borrowers a lump sum, or an initial amount and a monthly income. As the years go by, interest accumulates on the initial debt and, due to the effect of compound interest, represents an increasingly greater burden.
The reverse mortgage loses appeal for its borrowers due to the prudence of financial institutions, which have to cover themselves against the risk that the debt will increase more than expected if the owners exceed the average life expectancy, so that "the value of the outstanding debt from the reverse mortgage operation is greater than the effective value of the home and the remaining estate of the applicant,” as explained by Víctor González Rivero, a director of CajaMar Vida, in a study published in Fedea. To cover themselves, he explains, they limit the amount they lend at the beginning “not exceeding 40%-50% of the value of the home and additionally requiring a minimum value of the home” and that it be located in “urban, consolidated areas and with adequate services.” ”, generally in the best neighborhoods of the big capitals. And so, according to data from the notaries, despite the fact that the loan does not cover 50% of the value of the home, those registered last year were around 500,000 euros.
The rise in rates has meant that this amount has been lower this year: at an average interest rate of 6%, common in these products, if the loan were 60% of the value of the home in 9 years the debt would amount to 100 % of its value and from then on the debt generated by the loan would no longer have the guarantee of the home.
To avoid this situation, many entities include single-premium annuity insurance in the reverse mortgage, which gives meaning to an alliance such as the one signed by Banco Santander and Mapfre. The option, however, is controversial and has reached the courts in many cases: if the owner died within a few years, he would have received in income a percentage much lower than the value of the debt that encumbers the home.
According to González Rivero, potential clients are older people, with a “relatively low level of financial education”, a group “perceived as especially vulnerable”, so if the operation is taken to court they often rule against the entity that granted it. The credit.
Experts predict, however, that reverse mortgages, the sale of bare property or the assignment of future rentals will grow in the coming years. According to González Rivero, there will be “a generational change, as the generations born in the late 60s reach their retirement age, since their sociological patterns, aversion to debt and consumption habits” can make them value more the advantages of these operations than the risks they entail.
