A mortgage is a loan secured by a mortgage established on a residential property and entered in the land and mortgage register of a given facility. However, a special type of loan is a reverse mortgage.
Very often it is confused with an annuity, although the conditions for granting such financial products are quite different. Let’s check what it is and when it is worth using such a financial product.
Reverse mortgage – how does it work?
What exactly is an inverted mortgage and are there clearly links between it and a classic mortgage? Well, the most. It is a financial service that banks and banking institutions primarily address to the elderly, who are owners or co-owners of residential real estate.
A reverse mortgage involves the assignment of the right to real estate, usually a house or flat, and the bank decides to pay in exchange for ownership of the loan tranche every month, for the life of the person using the reverse mortgage. Rarely is the one-time payment of the entire amount of a reverse mortgage loan secured.
What Act regulates an inverted mortgage?
The legal act regulating this particular financial product available in Polish banks is the Reverse Mortgage Act of October 23, 2014. The Good Finance Investment Corporation is the body regulating the operation of a reverse mortgage.
Even before the entry into force of the said Act, there was a provision for life annuity in the Civil Code, practiced since 2008. However, there were voices that the mechanism by which entities of various types offered property owners in exchange for transferring ownership of an apartment or house to them was unfair to seniors.
The new reverse mortgage regulations were intended to change this. Did this happen The Act defines this product in art? 4, indicating that by the reverse mortgage agreement the bank undertakes to make available to the borrower for an indefinite period a specific sum of cash that will be repaid after the death of the borrower.
In turn, the borrower simultaneously in the same contract undertakes to establish security for the repayment of this sum together with interest due and other costs.
What is the difference between a standard and a reverse mortgage?
A properly reversed mortgage is the opposite of a standard mortgage. If the customer wants to buy real estate for a bank loan, he sets up collateral in the form of a mortgage entered in the land and mortgage register for the benefit of the lender. He receives the requested loan amount, which he uses when buying a house or flat.
The loan is most often obtained for a long period of time – even 25-30 years and the bank has solid security through an established mortgage. It gives the bank the option of taking ownership of a property if the borrower stops paying off the loan installments and fulfills his obligations to the bank.
In turn, the reverse mortgage works completely differently, because in this case, the natural person applying for such a financial product must already be the owner of the residential property. He concludes a contract with a selected bank, sets up a mortgage on his house or flat, and in return receives a monthly payment of a certain amount from the bank.
The bank decides to do so in exchange for the transfer of ownership of the property to that entity. The real transfer of ownership of residential premises to the bank may take place only after the death of the current owner of the property, i.e. the parties to the contract.
What is the difference between a reverse mortgage and a reverse mortgage?
What is the difference between a reverse mortgage and a reverse mortgage? Formally, by the reverse mortgage agreement, the bank undertakes to make available to the borrower an indefinite period of money. It is usually paid in installments, rarely in full.
Repayment of the loan so paid will take place only after the death of the borrower, and it can be taken by the heirs of the property owner, paying the appropriate amount together with interest and other costs due.
If the heirs do not settle their debts within 12 months, then the bank will gain the full right to the secured property.
Heirs do not have to pay back the reverse mortgage at all, but then the property on which the reverse mortgage has been secured will become the property of the bank, which will be able to use it freely. When the value of the property exceeds the value of the bank’s receivables, the heirs receive the resulting surplus.
A reverse mortgage is a name also used to describe another financial product – a lifetime annuity. How is an inverted mortgage loan for an annuity? Well, such an annuity is a twin product to a reverse mortgage loan, but it is not regulated by the Reverse Mortgage Act.
In the case of an annuity, security is also provided in the form of a mortgage on the flat or house, and at the same time, the pension is paid until the end of the life of the property owner, who retains the right to reside in the premises until his death. However, after the client’s death, the owner of a flat or house becomes a life annuity company.
In a life annuity, most often all costs related to the maintenance of the property, such as rent or property tax, will be regulated by the financial institution and deducted from the amount of annuity paid monthly.