In this country many retired middle class families are asset rich but cash poor. They may not be poor by accepted terms but they may have working cash problems.
This is due to the fact that the pensions they receive are much lower than the salaries they received when employed. It is no wonder that some seniors find it difficult to make ends meet, and that number is rising. The constant increase in life expectancy has played havoc with financial planning. To this must be added the constant rise in the cost of living.
I know of quite a number of seniors who have worked all their lives, collect a pension and receive the old age benefits paid out by the National Insurance Institute. But because of the financial environment, they find it difficult to cope, to financially keep their heads above water. So what to do?
The solution lies in their real estate assets. They are asset rich but cash poor. Many seniors own the home they live in. They can sell their home and get a nice sum of money and then move to a smaller, less expensive apartment and use the balance to help them out. But for most, that is not a solution. We are talking about people in their 70s and 80s who have lived in the same home for many years. For them, moving can be very traumatic. Moving is a difficult process under any circumstances, but it is doubly so for seniors.
Another option would be to sell their home and move to rented accommodation. But that option is even worse. On top of the traumatic effect of leaving one's home of many years and the unpleasant effects of moving house, finding long-term rentals in this country is almost impossible because such accommodation barely exists. Such a solution would be condemning seniors to have to move house at regular intervals.
Under these circumstances, the best solution of realizing one’s real estate assets is a reverse mortgage. In Western countries, especially in English-speaking countries such as the US, the UK, Canada and Australia, it is a widely accepted solution for seniors. In Israel, this option is more limited. Nevertheless, it is gaining ground.
A reverse mortgage is essentially a non-recourse loan a mortgage that does not have to be repaid by the borrowers but by their heirs. The borrowers do not make any monthly payments on the capital or the interest. They do not have to make monthly payments because the amounts due accumulate on a monthly basis. When the borrowers pass on, the heirs either repay the remaining balance of the mortgage which has increased with time and take out a conventional mortgage themselves to repay the debt and thereby keep the property or sell the property and pay off the debt.
Even if the original mortgage with the accumulated interest is higher than the value of the property, the borrowers cannot be evicted and can continue to live in the home for the rest of their lives.
Kobi Kalman is the CEO of Harel+60 Ltd a daughter company of Harel Insurance and Finance Group one of the country’s leading insuarance companies and one of the few entities in Israel which offer seniors reverse mortgages. Kalman who is one of the pioneers of the reverse mortgage concept in Israel explains that, “To be eligible for a reverse mortgage, one must be over the age of 60. If one is over 60 and needs money for any purpose, it is an effective tool that can enable one to live with dignity and maintain one's standard of living. With a reverse mortgage, there are no monthly repayments. The home remains owned by the borrower. If the borrowers so desire, they can repay the loan at any time without incurring any penalties. It is also possible to make monthly payments on the interest, and the mortgage will only increase with the increase in the cost of living index”.
The home remains the property of the owner at all times. But like all conventional mortgages, it serves as a security on the mortgage itself. The amount of the mortgage depends on the value of the property and the age of the borrower when receiving the mortgage. It ranges from 15% of the value of the property at age 60 to 50% at the age of 90.
This article was written in cooperation with Harel