- What is a reverse mortgage
- Requirements for retirees for reverse mortgages
- Reverse mortgage – guarantees for a pensioner
- All pros and cons of reverse mortgages
- Current statistics and outlook for the near future
What is a reverse mortgage
The mechanism of a reverse mortgage is that an elderly person takes a life loan from the bank against the security of his apartment. The amount can be paid to him as a whole – it can reach up to 70% of the market value of housing, and in parts over 10 years.
The borrower has the right to repay the debt ahead of schedule at any time, thereby preserving his apartment for himself. The financial institution, in turn, has the right to periodically inspect the apartment, which is the subject of the mortgage, in order to understand that it is being maintained by the owner in proper condition..
After the death of the borrower, the property is sold by the bank and the debt and accrued interest are paid off from the proceeds. The rest of the amount goes to the heirs of the pensioner, or, if they wish, they can pay off the debt to the bank, thereby obtaining ownership of the property. If there are no heirs, the remaining property of the borrower becomes the property of the state..
Requirements for retirees for reverse mortgages
Elderly Russians who want to participate in a reverse mortgage program must meet the following criteria:
- their age must be at least 60 years old, and the optimal age, according to ARIZHK, is 68 years old;
- the house in which they live must have at least 4 floors;
- their property should not be equipped with gas water heaters and located in houses intended for demolition;
- they must have ownership of the entire area of the dwelling, and not part of the house or apartment.
Reverse mortgage – guarantees for a pensioner
This financial service is not yet widespread in Russia, and for sure many pensioners will ask themselves the question: how safe is it to get involved in a reverse mortgage and what guarantees exist that they will definitely receive their money for an apartment and will not end up on the street while living?
As of today, reverse mortgages in Russia are issued only by the Agency for the Restructuring of Housing Loans, and all risks that may arise for participants in this program will be covered from the ARHML reserve fund .
In addition, the very mechanism of this financial service is extremely reliable. For example, with a life annuity, a financial institution must also support a person until the end of his life, but in this case it receives the rights to an apartment immediately after the conclusion of the contract, and transfers the money to the pensioner gradually, in small parts, and after his death, payments stop. Thus, if a person who has entered into a life support contract does not live long, it will turn out that he ceded the rights to his apartment for a symbolic amount of several thousand dollars..
When concluding an agreement on a reverse mortgage, it is agreed in advance how much the borrower will receive for the apartment. And the lender has the right to sell it only after the entire agreed amount has been paid to the borrower or his heirs. Therefore, unlike a life annuity agreement, pensioners may not be afraid that by taking a loan on a reverse mortgage, they will become victims of the next “black realtors”.
All pros and cons of reverse mortgages
- Absolute transparency and reliability of this financial instrument. The bank can sell an apartment only after the payment to the borrower or his heirs of the entire amount established by the contract, so you can be sure that the money will be paid for sure. In addition, a pensioner may not be afraid to be on the street, because he has the right to live in his apartment until his death;
- The right of the borrower or his heirs to repay the debt to the bank, thereby retaining the ownership of the property;
- Extinguishing any possible risks from the ARHML reserve fund
- A large loan amount (up to 70% of the cost of an apartment) and the borrower’s right to choose the method of receiving funds: in parts or in full. The latter method can be very useful if a pensioner urgently needs a large amount of money, for example, for an operation..
- Acceptable rates – no more than 9%.
At the moment, the main problem with reverse mortgages is that this concept has not yet been enshrined in Russian legislation. It is unclear what will happen if the borrower takes money for his apartment and at the same time bequeaths it to his heirs. Indeed, in this case, the creditor will not have a legal basis to sell it to pay off the debt. There is a hope that in the future, when the reverse mortgage project leaves the pilot stage, and this financial service becomes widespread, Russian deputies will definitely make appropriate changes to the legislation.
Another serious disadvantage is low rates, because of which it is simply not profitable for banks to provide the population with funds for reverse mortgages. After all, money is issued only at 9% per annum. While for ordinary mortgages the standard rates are 10-14% .
Current statistics and outlook for the near future
So far, reverse mortgages are not very popular among Russian pensioners. As of October 2014, about 50 applications for this financial service were submitted in the country. One of the loans was repaid by the heirs of the borrower, another 22 are being successfully implemented at the moment, and in half of the cases the option of gradual repayment of the loan was chosen, in another half – a one-time receipt of the entire amount.
According to the deputy general director of ARIZHK A. G. Semenyuk, while the pilot project of reverse mortgage was closed, since with the current interest rates it is simply unprofitable for banks and they are not interested in providing the population with this financial service. It remains to be hoped that in the future the government will be able to create conditions to make reverse mortgages attractive for both Russian banks and retirees by raising interest rates, and reverse mortgages will become commonplace and a popular loan product..