Reverse Mortgage – a Mortgage for the Senior Citizens
Going on pension often means a lower monthly income while, at the same time, living costs remain high and new necessities arise, such as the cost of protected living, one-time expenses, or assistance to the children, etc. A reverse mortgage (also known as a Pension Loan Scheme – PLS משכנתא הפוכה) is a loan, for any purpose, offered to applicants aged 60 and over, in order to supplement monthly income or finance a one-time expense, on terms tailored to the needs of third-agers. This type of loan is suitable for older people who own a residential property, who need the cash and to whom the bank is unwilling to provide a regular mortgage due to age.
A reverse mortgage is one of the financial options available to retirees to supplement income flow. People reaching retirement age can take a long-term loan using their property as collateral. Repayment of the loan is then offset against the beneficiaries’ inheritance. Possible purposes for the loan could be financing a move to protected living, expensive medical treatment, or simply increasing cash flow for any other purpose such as: home improvements, purchase of a new car, vacation or perhaps assistance to children or grandchildren.
For many years, financial institutions were reticent to offer the option of using a property as collateral for a monthly stipend. One of the concerns was possible harm to the image of the financial institution which could be perceived as taking advantage of elderly clients, as well as concerns about pressure being exerted on many of the elderly (even by family members) to use the property as collateral against a monthly stipend which would then immediately pass into other hands.
This type of loan carries a unique social sensibility. The implication of third-agers taking a reverse mortgage is ultimately to reduce the inheritance remaining for the children – a tough decision for parents to make. Also, since it is usually the children who will eventually have to attend to closing the loan, the financial institution requires each of the borrower’s children to sign a document confirming that they are aware of the mortgage and to undertake, as heirs to the property, to repay the loan - in the event the borrower dies before the mortgage expires – either by sale of the property or by taking a new mortgage. Any balance remaining after the sale is paid either to the borrower or to the heirs. When the time comes, the loan is repayable according to the terms originally selected by the borrower.
The requirements for taking the reverse mortgage are simple: the borrower must be 60 years or over, own a property and have an acceptable credit rating (no income test is required). The property must be legally registered, and the children (the heirs) must sign acknowledgement that the parents are taking the mortgage.
The value of the loan is a function of the value of the property and the age of the borrower: 15% of the value of the property, as determined by the bank’s assessor (at age 60), and up to 50% (from age 90 and above). Simply put, the older the borrower the higher the ratio between the value of the loan and the value of the property.
Interest payable on a reverse mortgage should not be much different from the interest payable on a standard mortgage and is generally between 0.3% - 1.3% higher.
When taking a reverse mortgage, consider the following additional costs: opening a mortgage portfolio, assessor’s fees and legal fees.
Several financial institutions operate in this specialized field (both banks and insurance companies) and offer a range of loan options to suit the borrower’s requirements:
• Supplemental income A fixed or flexible monthly income supplement
• Single payment One-time payment to finance a large expense
• Hybrid payment Part paid as a lump sum and the balance in monthly installments
• Repayment on loan retirement The beneficiaries have a period of 12 months to repay the loan using personal capital, sale of the property, or a new mortgage
• Payment of interest only
• Principle repaid on retirement of the loan The beneficiaries have a period of 12 months to repay the loan using personal capital, sale of the property, or a new mortgage
Advantages of a Reverse Mortgage
• The mortgage can serve a range of purposes: maintain standard of living, finance a move to protected living, assistance to the children, finance a one-time expense, cover obligations, or any other purpose.
• There is no need to sell the property. The borrower retains ownership and continues to live there.
• It is the only loan that has no time restriction. It can be repaid at any time without a penalty or early redemption charge.
• Repayment of the mortgage can be deferred as long as required, up until the death of the borrower (or borrowers).
• No guarantors or life insurance are required.
• It is a nonrecourse loan – only the property serves as collateral against repayment of the loan, and no other assets of the borrower or the children can be seized to repay the loan.
In summary, a reverse mortgage enables third-agers to take a loan, that is compatible with their situation and requirements, using their property as collateral and deferring monthly repayments on the mortgage (even up until the passing of the borrower) thereby providing financial security during the pension years.