What do a mortgage and a home have to do with pensions? More than one would think.
By JUAN DE LA ROCAhouse interior 88 248(photo credit: Courtesy)
What do a mortgage and a home have to do with pensions?
More than one would think.
It is now possible for Israelis to use their home as a medium by which to increase their pension income and thereby enhance their standard of living.
Yaki Cohen, manager of the reverse mortgage department at Clal Financing, explains. "Many of those living on a pension live modestly - but not by choice. However, many retirees while being cash poor are asset rich because they own their own homes. So the question arises, 'How can they make use of these valuable assets to augment their monthly income?'"
The answer is a reverse mortgage.
"A reverse mortgage enables the elderly to enjoy the comfort of continuing to live at home while garnering a substantial increase in their disposable income," says Cohen.
Sounds great. But what does that mean?
A mortgage is a financial transaction in which a client gets a loan from a financial institution, generally a bank, with which to buy a house. The money is paid to the owner of the property, who is selling it to the borrower.
A reverse mortgage is a financial transaction in which the owner of the property gets a lump sum of money with his house or apartment as security. The agreement states that this will be a standing loan. It will not be repaid in monthly installments. The capital and accumulated interest will be repaid upon the death of the new owner and not before. This means that the borrower can live in his home to the end of his or her days.
Upon the death of the borrower, the heirs will decide whether to redeem the loan and take possession of the property or to sell the property and repay the loan from the proceeds and pocket the balance.
If the amount of the loan and accumulated interest are higher than the value of the property, then the financial company will sell the property itself and try to get the highest price.
Israel is a very suitable country to run such an enterprise. In the United States, 57.2 percent of all householders own their homes. In Israel, more than 70% own their homes. And the percentage increases with age. In most cases, the young do not own the homes they live in. However, most of the older population own their homes.
For elderly homeowners, not to mention their heirs, this is a win-win situation, says Cohen. In many ways, it is like having your cake (the home) and eating it, too (selling it). The money can be used to purchase a pension plan to augment an existing pension or for any other purpose.
The amount of money one can get for one's home is contingent on the age of the borrower. The younger the borrower, the more interest accumulates by the time one has reached a ripe old age. Thus a borrower of 60 will get a loan that is not greater than 15% of the value of the property. By the age of 65, one will be eligible for a loan of 20% of the value of the property. At 80, the loan will amount to 35% of the value of the property, while a 90-year-old will receive 50% of the value of the property.
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