Reverse mortgage for the third age: first or last resort?
Many in the third age looking for available cash for various purposes are opting for the reverse mortgage model - a loan against the property they own. Why has this controversial financial product become a hit, who allows it, and why is the age factor important? Experts explain what is important to check, why heirs are part of the process, and what financial scams or mistakes might trap those who sign on to the move. Sixth article in a series about Israelis of retirement age.
“Even as a young couple, we dreamed of the moment we would take a break from life and travel the world. After we retired, when we were close to 70, we decided it was time,” says Niva (a pseudonym). “At the same time, I decided it was time for a facelift, and we also wanted to give a sum of several tens of thousands of shekels to each of our two children. After a simple calculation, we realized it was a sum of about a quarter of a million shekels. Not sky-high, but we didn't have that amount in liquid form, and we didn't want to spend savings. After checks and thought, we decided to take a reverse mortgage, which would allow us to turn our wishes into reality.”
Niva and her partner are one example of a phenomenon that is expanding among the third age, taking a financial loan - not for the purpose of purchasing property, but for other purposes related to lifestyle. The increase in life expectancy and the desire for quality of life even at a relatively old age have led banks and financial companies to offer this age group dedicated loan options. As of today, there are two main types of loans: a loan for any purpose and a reverse mortgage, which has recently become an increasingly sought-after product, a kind of 'rising star', but a controversial one.
Features and lending conditions
It should be emphasized: taking a reverse mortgage is not for the purpose of buying an apartment. For that, there is a regular mortgage. Although, as age increases, the desire is to finish debts and mortgages, still, there are quite a few in the third age who seek to purchase a second or third apartment. In fact, legally, in Israel there is no age limit for taking a mortgage. However, most banks allow taking a mortgage up to about age 70–75, meaning the age at which the loan ends will not exceed this threshold. Banks tend to approve such a mortgage for the third age when the monthly repayment does not exceed a third of the borrower's disposable income, and the requested repayment period is not too long.
In contrast to a regular mortgage, a loan for any purpose and a reverse mortgage do not come for the purpose of purchasing property, but for other purposes, in exchange for mortgaging an existing property. Since a loan for any purpose is given without the need for an explanation of the purpose of the money, some use it for the purpose of purchasing real estate abroad. Those who offer these loans are banks, credit card companies, and non-bank companies, with each request checked according to the credit history and financial situation of the borrower.
Recently, there have been more and more requests for receiving a reverse (pension) mortgage, which until recently was given to borrowers over the age of 60, and today to borrowers over the age of 55. Usually, it is a financing amount of up to 45% of the value of the existing property. Banks, as subject to the regulation of the Bank of Israel, offer a loan when the maximum years for repayment is 30 years, when the young borrower's age will not exceed 85 until its end. In insurance companies, it is a loan without a repayment date, until the borrower's death.
Risks and the role of heirs
“A reverse mortgage is first of all a mortgage, and it has meaning at any age,” says Nofar Yaakov, a senior economist, private mortgage consultant, and chair of the Mortgage Consultants Association. “In the last five years, we see a significant increase in the request to receive it among the third age. This connects to the increase in average life expectancy and the desire to live well at any age.”
The big problem of a reverse mortgage is the heirs, who must give their consent or their knowledge to the process. Since as an heir, the value of the property he will receive on the property mortgaged for the mortgage will always be lower than its real value, almost in every family such a decision by the parents raises questions and concerns from the heirs. The children complain that “they are eating their inheritance”. In addition, in insurance companies, from the moment of the borrowers' death, the heirs have a year to sell the house or pay the loan.
Practical expert advice
Mortgage consultants emphasize that the important thing is to pay attention to checking the tracks and interest rates offered for mortgage repayment. “Knowledge equals money,” says a mortgage consultant at one of the leading banks. “As an example, to know that at a certain age there are clauses that are no longer necessary and one does not need to pay for them. For example, over the age of 67 there is no insurance for loss of working capacity. I recommend checking the conditions and mortgage payments every year.”
What things should one be careful of? “It is known that in the third age the resistance capacity is lower, and there are those who exploit this. There are companies that offer money easily and quickly and with easy and accessible accompaniment. One needs to be careful of this. In the process of choosing a mortgage consultant, I recommend not signing at the moment of the meeting, and also receiving several pieces of advice from financing bodies that specialize in the subject. The cost of a standard consultation ranges from 8,000 shekels to 12,000 shekels, and if they ask for more, check the consultant or the consulting company,” adds Yaakov.
There is sweeping agreement among all mortgage consultants: whatever the purpose, in the third age it is better to be realistic, perform early financial planning, compare offers and ensure that the loan repayment is suitable for the economic ability.
