This not very common financial product first appeared in the 1960's in the English speaking countries (the UK and USA) but its introduction in Spain looks to have had an important impact upon families and individuals particular on an economic and social level, although it has given place to a series of doubts that are mentioned at the end of this article.
Following the Statement of Motives of the Law 41/2007, the reverse mortgage - also referred to as the "life mortgage" – is a financial product that seeks to alleviate one of the socioeconomic problems that Spain and the majority of developing countries has: satisfying the increasing need of income during the later years of life. The subject is, for the Spanish Mortgage Association, an unavoidable necessity, an urgent obligation, that must be treated in a much wider context as a consequence of it criticizes the act of having placed the regulation of this new financial product within an Additional Disposition of a Law.
We continue to describe the principal aspects of the regulation of the reverse mortgages:
The First Additional Disposition of the Law 41/2007defines the reverse mortgage as a loan or credit, that can only be granted by credit entities and by those insurance companies authorised to operate in Spain, which is guaranteed by means of a mortgage over real estate that constitutes the habitual residence of the applicant. The possibility is also established that reverse mortgages can be charged over any type of real estate that are not habitual residences, in which case it will not be governed by the same rules established in this First Additional Disposition.
The granting of a reverse mortgage over a habitual residence is subject to compliance with the following requirements:
a) that the applicant and the beneficiaries designated by him, can be persons of an age equal to or above 65 years or that they are affected by severe dependency upon others.
b) that the debtor has arranged the loan or credit by means of periodic or one-off payments.
c) that the debt can only be demanded by the creditor and the guarantee only when the debtor dies or, if it is stipulated in the contract, when the last beneficiary dies.
d) that the mortgaged premises have been valued and insured against damage in accordance with Law 2/1981 of the Regulation of Mortgages Market.
Once the mortgaged debtor dies, and there remains no other beneficiaries, the legal heir of the debtor can opt to (i) cancel the debt within the deadline stipulated, in which case they must pay the creditor of the mortgage in full the due debt plus any interest accrued, and without the creditor being able to demand compensation for the cancellation or (ii) not to repay the debts due, with their additional interest, permitting instead that the mortgage creditor can recover the sufficient amount from the inheritance goods. To this effect, it is expressly removed the established second paragraph of the Mortgage Law that prohibits the possibility that the mortgage can insurance interests for a period superior than 5 years.
In light of this, the maximum sum of the debt that can be conceded to the mortgage debtor is to be fixed by the percentage of the value of the valuation in the moment of executing the reverse mortgage. Once the debtor has at its disposal all of the sums sufficient for said percentage, the aged or dependent debtor can quit the disposal the loan and the debt will continue to generate interest. The repayment on behalf of the creditor entity of the debt (including interest) will usually take place in the moment of the death of the debtor (or last beneficiary) by means of cancellation of the debt by the heirs or by the execution of the mortgage guarantee by the creditor.
The First Additional Disposition establishes as a reason for anticipated termination of the debt or mortgage credit the voluntary transmission of the mortgaged goods by the mortgage debtor before his death, save that they proceed to substitute the guaranty in a sufficient manner.
Equally, it establishes a series of financial reductions and notary and registration fees relating to the grant of the reverse mortgage.
In summary, although there are some current information such as the aging of the population or the increase of the percentage of residential property that could increase the possibility of success in this new financial product to medium or long deadlines, there also exists the paradox of other arguments that clash head-on with the possibilities of success of the reverse mortgages.
In this way, the latest trends in the marketing of the mortgage loans is to extend the deadlines of repayment of the same until 40 or 50 years, having the effect that the reverse mortgage can become an ineffective product for their future beneficiaries.