Lifetime Loans (or hipoteca inversa in Spanish), despite being relatively well-known and accepted in Anglosaxon countries for decades, are only just getting started in Spain. Back in 2006, acting on behalf of a foreign lender, I was one of the first lawyers to formally introduce them.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2011
Photo credit: Courtesy Daily Mail. © Alamy.
It wasn’t until the fall of the following year, with the amendment brought about by Law 41/2007 to the all important Mortgage Act of 1981, in which for the first time a Spanish Law ruled on this “new” financial service. Even so, it brushed on it ever so lightly, almost in a shy fleeting manner, in its Additional Dispositions. Reserving the brunt of the regulation for future legislation. Here’s hoping.
What is a Lifetime Loan?
It works basically as a reverse mortgage (‘Hipoteca Inversa’ in Spanish). It is a special type of home equity loan for senior citizens. It allows owners to convert some of the equity in their homes to cash by placing a charge against their property (which acts as collateral). The loan does not have to be repaid during the homeowner’s lifetime.
The borrower retains full ownership of the home and can actually continue living in it until they or their surviving partner passes away. Once this takes place, the loan (plus accrued interests) must be settled by either selling the property or else by the appointed heirs who will repay it in full. The loan can be taken either as lump sum or periodically at the borrower’s choice. The older you are the larger the amount of money you can qualify for as it follows a sliding scale.
At no time will the borrower ever owe more than what the collateral is worth even if the resulting debt is higher. Meaning that at the time of passing away it suffices to either hand over the property to the lender or else to pay to settle the debt for good. The afore has huge legal implications as it implies that, unlike a normal Spanish mortgage loan, with a Lifetime Loan you cannot be pursued for negative equity. In other words, the valuation of the property for the purpose of requesting this loan facility is the threshold you can expect to owe a lender on signing on the dotted line.
Who qualifies for a Lifetime Loan?
In Spain, following Law 41/2007, those who qualify must be aged 65 and older or else have a medically certified serious disability.
A Lifetime Loan may not be suitable for everyone.
Financial turmoil on an unprecedented global scale entails continued Government budget cuts which affect Public Pension expenditure. Relying on a State pension is a one way ticket to a roller coaster ride with your own hard-earned money! Governments, for the foreseeable future, will continue to curtail public expenditure (i.e. Pensions) as well as adding more years on the retirement age. For example, Spain has just approved delaying by 2 years the age of retirement, bringing it to 67 besides reducing the amounts themselves. Furthermore, they’ve already hinted that in the near future they will set back retirement by a further 2 years; tallying a total of 69 years to retire. It is in such times that the benefits of a Lifetime Loan (LTL, for short) become self-evident:
- You do not have to repay the loan during your lifetime as the interests are rolled up and added to the loan amount. Unlike a standard mortgage there are no monthly repayments (so you cannot fall into arrears). If you are a couple the loan is only due after the surviving partner dies. It is repaid or settled only after you’ve passed away by your heirs normally discounting it from the sales proceeds of the property.
- You can choose to withdraw the facility either periodically or else in lump sum (cash). Or maybe even choose a combination of both.
- The drawdown has no restrictions. Meaning you can use the drawdown facility for whatever pleases you. i.e. pamper yourself with a luxury holiday to New Zealand.
- Neither you nor your heirs will ever be pursued for negative equity abroad (as would be the case of a standard Spanish mortgage) as the responsibility is not personal but limited to the asset itself. The maximum amount owed (accrued compound interests and expenses included) will never exceed the valuation of the property (collateral) by Law.
- A LTL adds financial security supplementing nicely increasingly low State pensions. Not everyone can afford to subscribe a Private Pension scheme. So basically you will have more money to spend at the beginning of each month in your bank account.
- Strengthening of the euro against sterling translates into diminished acquisition power by Expats living in Spain. The case of UK senior citizens has been particularly dramatic over the last years as they’ve lost over 30% in purchasing power on living in Spain which has forced many to change or even completely redefine their lifestyles. A LTL is released in euros against your existing Spanish property thus helping to offset any currency exchange fluctuations which may harm your pocket.
- A LTL allows you to retain full ownership without taking away your home whilst you live which is a significant boon. So basically you now have more money available to spend in anything you like whilst being able to live in the property for the remainder of your life. You will never lose the property, by Law, as long as you live which is fairly reassuring.
- A LTL is most helpful for those who are asset rich but cash poor. It helps you to unlock the hidden equity tied into your property. Many Expats who bought prior to the last boom have huge amounts of equity locked away in their properties.
- A LTL is non-status, meaning there is no income requirement.
- It goes without saying that a LTL helps to mitigate stress as you no longer have to worry for the remainder of your life to make ends meet.
- The older you are the more money the Lender is willing to lend you.
- LTL are ideal if you have no heirs or else they are already sufficiently provided for with other assets.
- You can still sell the property but you will have to repay the loan in full.
The main problem will be your heirs. Those who stand to inherit will be most reluctant in you hiring a LTL and will attempt to hack any budding ideas you may have on the matter. And the reason is simple. When you pass away, the outstanding debt will be deducted from the sales proceeds of the property. A heir therefore stands to inherit less (or even nothing at all) which helps explain why LTL are so unpopular with potential Spanish beneficiaries. In extreme cases the outstanding debt may eat away all the equity. In such cases a Lender will normally retain the collateral (your home) in return of settling the loan in full. A heir would much rather hand over a property (which no longer has any equity left) than paying the debt in full (which amounts maximum to the property itself).
- The main disadvantage is the interest rate charged. If its high enough it may imply your heirs foregoing inheriting the property. So basically it’s as if you had mis-sold your home to a lender, on passing away, for a fraction of its true market value. This is particularly true the longer you live, as more compound interest will be accrued over time eroding the equity until none is left.
- On applying for a LTL you will always be given less money for your home than if you applied for a standard mortgage.
- The property must be free of charges, encumbrances and debts. If there’s already an outstanding mortgage on it, the application will most likely be turned down. A typical problem I found were mortgages which had been cancelled at the Notary but not at the Land Registrar so they showed up on requesting the properties legal status.
- LTL have a positive correlation with the property cycle (this is bad). Meaning that when real estate outperforms Lenders will fall over themselves to offer you one. But when real estate slumbers Lenders are prone to pull away LTL or else make them less attractive by restricting their access as there is a shortage of liquidity. Oddly enough the latter (recessions) will be the time when potential clients will need LTL the most! There’s a great phrase of American author Mark Twain which coins it up: “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain”.
- You need to be 65 or older to qualify (this may be revised upwards with the amendments to Spain’s retirement age).
- The younger you are (closer to 65 y.o.) the less money you will receive.
- You will have to pay the valuation of the property out of your own pocket (several hundred euros) before the Lender actually decides on whether they grant you -or not- a LTL. In fact, the valuation is pivotal to their decision-making.
- The maximum amount of the facility will equate to the properties value and how old you are. This amount is normally only a fraction of the properties true value.
- Once you have withdrawn the facility you can no longer request additional funds or remortgage the property if needed be (i.e. unexpected Health disbursements).
- A LTL is taken on your permanent residence. So you actually need to live in the property all year round. The logic behind this is that the Lender wants the collateral to be in tip-top shape. A property with no one living in it will quickly fall in a state of disrepair and be subject to break-ins or vandalism which diminishes the collateral’s value.
- For the reason above letting will normally be forbidden.
- If you require to move away for long-term care the repayment may be due in full.
- Taking on a LTL requires a charge is placed against the property which has associated expenses and taxes. Request beforehand a detailed breakdown of what the loan entails prior to making up your mind so as to avert unpleasant surprises in the form of unexpected disbursements.
Retirement nowadays is akin to playing a soccer match in which the Government keeps moving the goal posts mid-play! Some people would rather not take chances with their retirement playing it safe.
A Lifetime Loan may be a good option that can help you and your partner achieve that extra income to help you get by more comfortably without changing your lifestyle (or even improving it!). I would however strongly recommend you to obtain independent legal advice prior to hiring a LTL so as to avoid rash decisions.
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