The reverse mortgage is a financial product that's little known compared with a traditional mortgage, but it can be of interest to a very specific profile: older homeowners looking to supplement their income without having to sell or move out of their home.
What a reverse mortgage is
It's a loan secured against your primary residence in which, unlike a conventional mortgage, you don't pay monthly installments: instead, the bank pays money to you, either as a single lump sum, as periodic monthly payments, or a combination of both, while you remain the owner and continue living in the home.
Common requirements to take one out
- Being over a certain age (usually 65, though this can vary by lender or if there's a recognized dependency situation that lowers the requirement).
- Owning the home offered as collateral, generally free of charges or with a reduced charge.
- The home meeting certain appraisal and location requirements set by the lender.
What happens to the debt and the home
The debt (plus accrued interest) isn't paid during the holder's lifetime: it keeps accumulating and is only settled when one of the events set out in the contract occurs, typically the death of the holder (or of the last surviving holder, if there's more than one). At that point, the heirs have the option to:
- Pay off the outstanding debt (with their own funds or through a new loan) and keep full ownership of the home.
- Sell the home to cancel the debt, keeping the difference if the sale price exceeds the outstanding debt.
- Do nothing, in which case the bank can enforce the guarantee to recover the debt through the property itself.
The guarantee that the debt won't exceed the home's value
An important protection built into this product in Spain is that, generally, the debt that can be claimed from the heirs cannot exceed the value of the home at the time of settlement, even if the interest accrued over the years would have exceeded that value. This protection, however, should always be confirmed against the specific terms of each contract.
Advantages and drawbacks to weigh
- Main advantage: obtaining additional liquidity during retirement without having to sell or leave your primary home.
- Main drawback: it reduces (or completely eliminates) the inheritance in the form of a debt-free home that your heirs would otherwise receive, since the accumulated debt is deducted from the property's value.
It's not the only option for supplementing your retirement
Before taking out a reverse mortgage, it's worth comparing it with other ways to draw liquidity from your home (such as selling and then renting it back, or simply selling and moving to a lower-value home), as well as with other ways of supplementing your pension that don't involve your primary residence.
Estimate your retirement pension first
Before weighing supplements like a reverse mortgage, it helps to have a clear starting point. Our retirement pension calculator gives you a rough estimate of your future public pension.