Reverse Mortgage Retirement

Mortgage retirement is a subject that I tried to avoid on this Web site. Simply because I do not have any firsthand experience on this subject. My opinion would be just that: an opinion.

The closest exposure I got to this type of scheme was when a Swiss friend, living in Zurich, excitedly told me about the deal he concluded. He and his wife don't have children. They have rented an apartment all his working life. At retirement his Swiss bank approached them with this deal:

They purchased a brand new apartment of their choice. The bank gives them a 100% loan. They repay monthly the interest on this loan. At the death of the last one of them, the loan gets cancelled and the property reverts to the bank.

Interest rates are near zero in Switzerland, so their monthly 'rent' is much less than the regular rent they were paying.

I suppose this deal can only happen in Switzerland where inflation is near zero, where the window for repayment of mortgages can stretch over generations, and where the quality of material used for building is such that it would last a hundred years.

Variations of this concept is found all over the world. In Italy it's called nuda proprietà – translated 'naked property'. In France it is called viager – a word for pension.

It is probably best developed and regulated in the United States of America. It is also in the US where most reports of 'abuse' originate.

It is clearly a case of caveat emptor – let the buyer beware! But that's true for any investment or deal.

Let's list some features that make reverse mortgages attractive to retirees who own a home:

  • You don't need an income or credit worthiness to qualify.
  • To qualify, there need to be enough equity left if you have an existing mortgage.
  • You retain full ownership of your home.
  • You can sell your home at any time and use the proceeds to repay the loan.
  • The loan is non-recourse and your heirs will not have to pay it back.
  • If the property increased in value, your heirs will receive the balance after the loan has been paid back.
  • If you and your spouse are the borrowers, the loan becomes due only when both of you have passed away.
  • Even if you are wealthy you can still use this scheme to liquidate equity from your home.
  • Mortgage retirement does not affect your social security income.

If you are considering a reverse mortgage, do invest the time to attend a reverse mortgage seminar before you attend a counseling session with an expert specialist. The key is to understand all aspects of the deal and to eliminate uncertainty!

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