A reverse mortgage lets your home pay its way

"With a reverse mortgage: the financial institution gives cash or credit to the home owner, with the property as a security."

By JUAN DE LA ROCA
nice home 88 224 (photo credit: Eyal Izhar)
nice home 88 224
(photo credit: Eyal Izhar)
The Western world is undergoing rapid demographic changes. Life expectancy is increasing and modern medicine is not only allowing people to live longer, it is also allowing older people to live healthier lives. But while senior citizens want to live fuller, more active lives, they cannot always afford to because, in most cases, their income is derived from fixed monthly payments. People who have reached the age of 75 usually cannot find a job. So what should they do? Most of these elderly people, especially in Israel, own the apartments or houses in which they live. That means they may lack ready cash but they have tangible assets. These assets cannot be realized because it is where they live. But in most cases they are the only assets owned by the elderly. According to Amnon Mader, general manager of reverse-mortgage specialists Bayit Maniv, "An apartment or a house are the only assets an elderly person owns besides their pensions - provided they have one." "A reverse mortgage is a financial tool that allows the elderly to make use of the property they live in as a means to generate extra capital," he recently told The Jerusalem Post. "It is called a reverse mortgage because that is what it is. A mortgage is a financial tool in which a bank or financial institution finances the purchase of a house or apartment. A reverse mortgage is the opposite: the financial institution gives cash or credit to the home owner, with the property as a security. "In both cases the client will live in the property acquired, but while in the first case he is required to repay the mortgage in regular monthly payments, in the second instance, that of the reverse mortgage, no payments are involved. The interest accumulates and is repaid together with the capital at a future date." The future date is when the borrower or borrowers die, or whenever they wish to settle the loan. The idea of the reverse mortgage is that the elderly owner or owners of the property get a certain amount of money as a loan/mortgage. Since there are no repayments made, the principal grows with the accumulated interest. When getting the loan the borrowers gets a legally binding agreement from the lender, stating that the borrowers can stay in the property as long as they wish. They can repay the balance of the loan at any time they wish or their heirs can do so. Alternatively, the heirs can sell the property, repay the loan and pocket the balance; or if the principal plus the accumulated interest exceeds the value of the property, they can just pass on the deeds of the bank or financial company. Reverse mortgages are non recourse credits, which means they are only guaranteed by the property itself. "The reverse mortgages can solve the financial problems of those who have reached an age where going out to find a job is no longer a feasible alternative," Mader said. "From our experience," he said, "many of those who do a reverse mortgage use the proceeds to augment their pensions. It is now possible to purchase a pension that will augment the current income. Others use the money on all sorts of things - a voyage overseas they have always dreamed about, helping ones grandchildren... "In the future, the number of those who will be using the funds derived from a reverse mortgage to augment one's current pension will increase. Pensions in this country are linked to the cost of living and not to the median wage, which rises faster than the rise in the cost of living. As a result, the value of a pension in relation to the standard of living contracts with time. "The amount one can get from a reverse mortgage varies slightly with the different financial companies that deal with these loans, but the principal is the same. The amount of the loan depends on the value of the property and the age of the client. The older one gets, the higher the reverse mortgage. On average, a 90-year-old can get 50 percent of the value of the property; a 70-year-old about 15%. "This is reasonable. The amount of the loan increases with time because of the accumulated interest. A 70-year-old will live longer than a 90-year-old, which means that the loan of a 70-year-old may well triple, while that of a 90-year-old will increase much less," Mader said.