OTHER REAL ESTATE ASSET CONVERSION PRODUCTS RELATED TO THE REVERSE MORTGAGE.
The term real estate asset conversion products have its origin in the English concept of equity release schemes.
Under that title, the economic-financial process of transformation of a fixed asset into a liquid asset is described.
To this end, converting the value of a property into periodic income would include, in addition to the reverse mortgage, the housing pension, the life annuity contract, the conversion of the dwelling into an insured life annuity, or the maintenance contract.
However, unlike the reverse mortgage, they involve the transfer of ownership of the home, so the heirs do not have the option of acquiring the property.
- Housing pension (sale with reservation of usufruct or sale of the bare property).
The housing-pension product may be an ideal solution for those who need to sell their home in order to obtain additional income and who are interested in continuing to live there for life.
The housing-pension product consists of the sale of the dwelling with reservation of the right of life usufruct. Our Civil Code regulates in its arts. 467 to 522 the real right of Hsbc Equity Release usufruct. It is about the right to use and enjoy the thing usufruct. The owner of this right over a home (usufructuary) can not only use it but also rent it (receive its fruits). In this way, the owner has the bare ownership of the house, but not its use and enjoyment, which corresponds to the usufructuary
Therefore, the housing-pension operation consists in that the owners of a house sell it and obtain a price in exchange, but retain the usufruct, that is, the right to use and enjoy it while they live. They can continue to inhabit the home, or even rent it, until the moment of death.
Naturally, the value of the sale subject to the right of usufruct will be less than that of the sale of full ownership. The difference will be inversely proportional to the age of the usufructuary: the greater the life expectancy, the greater the value of the usufruct, and therefore the lower the amount received from the sale.
When the death of the usufructuary occurs, the usufruct right is extinguished and full ownership is consolidated. In this way, the acquirer, who until then had only a limited property right, now has a full right.
- Life annuity contract.
Another possibility is the life annuity contract, which is defined by art. 1802 CC as that random contract by virtue of which a person is obliged to pay a pension or annual income during the life of one or more specified persons, in exchange for capital in movable or immovable property, whose domain is transferred, of course, with the burden of the pension. Randomness occurs insofar as the final amount of the pension may be higher or lower than the value of the transferred assets.
The doctrine defends in this sense the use of traditional institutions to meet the needs of the elderly, such as the life annuity contract, instead of importing products such as the reverse mortgage that deviate from the traditional configuration of the mortgage in our legal system. And he defends the use of this institution with respect to the reverse mortgage for various reasons.
In the first place, because of the possibility of transmitting the bare ownership of a property as capital, with which the rentier could continue to enjoy the property thanks to a usufruct. This would achieve the same practical effects as the reverse mortgage.
Secondly, due to the lifetime nature of the contract, which does not take place in the reverse mortgage, so it would not be necessary to conclude insurance to continue receiving the rents, and due to the absence of the payment of costly delinquent interest.
And third and last, due to the possibility that the rentier transmits his right to a third party, which cannot be done by the beneficiary of the income in the reverse mortgage.
Certainly, the empowerment of this institution could serve in those cases in which the elderly person does not have heirs, and allows the elderly person to disengage from paying all expenses associated with property ownership, such as real estate tax or the community of owners.
- Transformation of the home into an insured life annuity.
Regarding the conversion of the home into an insured life annuity, the legislator has fiscally strengthened this option, through Law 26/2014, of November 27, which has modified art. 38 Law 35/2006, on Personal Income Tax.
According to this precept, the interested party, who must be over 65 years of age, can transfer, leaving the capital gain tax-free, not only the home but any patrimonial asset, provided that the total amount obtained by the transfer is used to constitute an insured life annuity and is constituted within a period of six months from the date of transfer of the patrimonial element. The maximum total amount whose reinvestment in the constitution of life annuities will give the right to apply the exemption will be € 240,000.
Another tax benefit included in Law 35/2006, in its art. 7 v), is the exemption of the income that becomes evident at the time of the constitution of insured life annuities resulting from the individual systematic savings plans, referred to in the third additional provision.
Likewise, the taxation of the life annuity that is collected each year is also very favorable, since, after 70 years of age, 92% of the amount collected is exempt from personal income tax, and is only taxed for 8 %, according to the provisions of art. 25.3 of Law 35/2006, of November 28, on Personal Income Tax.
In this way, the seller can obtain financing for the market value of the house (significantly higher than the value for which it can be mortgaged). For this reason, the life annuity that you can acquire will also be much higher than that of the mortgage alternative.
The great drawback of this figure compared to the reverse mortgage is that the seller loses the use of the transmitted home. It would therefore be an interesting alternative, given its tax benefits, in the case of having a second home.
- The food contract.
The arts. 1791 and following of the Civil Code, regulate the maintenance contract, by which one of the parties -the obligee- is obliged to provide housing, maintenance, and assistance of all kinds to a person -the obligee during his life, in exchange for the transfer of capital in any kind of property and rights.
The inclusion of these precepts in the Civil Code took place thanks to Law 41/2003, of November 18, on Patrimonial Protection of people with disabilities, and the usefulness of this contract, according to its Statement of Motives, is especially patent when it is the parents of a child with a disability who transfer to the obligor the capital in movable or immovable property for the benefit of their child through a stipulation in favor of a third party.
Therefore, this contract, which has a broader scope of application than the life annuity contract (the reference to "capital" allows to include other types of movable or immovable property, such as rights), allows a person (the transferor, that it does not have to meet certain subjective requirements) transfer a real estate so that she or a third party designated by her can enjoy housing, maintenance, and assistance during her life. In practice, the bare ownership of the habitual residence is usually transferred to the obligor, who accesses the Property Registry, while the obligee retains the usufruct, thus guaranteeing the enjoyment of the house until his death.
In relation to the content of the obligor's obligation, they will be those that result from the contract, for example, a generic reference can be made to the legal maintenance obligation or a more detailed description, and, in the absence of an agreement to the contrary, it will not depend on the vicissitudes of the flow and the needs of the obligor or of the flow of the recipient (art. 1793 CC), that is, it will depend on the specific needs of the obligee.
Failure to comply with the maintenance obligation will entitle the obligee -without prejudice to the provisions of art. 1792 CC- to choose between demanding compliance, including the payment of the accrued prior to the claim, or the termination of the contract. In this sense, the art. 1797 CC that the right of the obligee may be guaranteed against third parties with the pact registered in the Property Registry (if registrable goods are transferred, such as a property) in which the non-payment is given the character of an explicit resolution condition, in addition to through the right to mortgage (art. 157 LH).
Finally, the Law did not incorporate tax exemptions that would make this figure more attractive, which has been doctrinally criticized. Given that the obligee cedes the habitual residence to the obligee, which ordinarily will take place in a public deed, this will in practice imply the payment of the tax on legal acts documented by the obligee, and that of patrimonial transfers by the obligee.
SAW. FINAL THOUGHTS.
- The reverse mortgage opportunity.
Given the doubts that the future of the public pension and the concentration of savings in Spanish real estate are rising, the reverse mortgage is once again on the table as part of the solution to the loss of income of the oldest.
In Spain, statistics indicate a gradual aging process that will make it the second oldest country in the world in 2050, and in 2060 the population over 65 will reach 15.6 million people (doubling the current population).
This demographic evolution and its impact on the public coffers can lead older people to the constitution of reverse mortgages to supplement their income.
To this, we must add the high rate of homeownership. In Spain, there are more than 8 million people over 65 years of age, and 90.1% own a home.
The accumulated savings in housing reaches 600,000 million euros and there is a lack of final savings in pension and retirement plans.
It is also necessary to highlight the new sociodemographic trends: at the sociocultural level, the evolution of society towards new types of families, the drastic fall in the birth rate in recent decades, and the increasing mobility of children, especially in the years after the outbreak of The crisis is expected to affect the culture of intergenerational transmission of heritage, diminishing the desire to transmit a house free of burdens to children.
Alternatives that allow you to retain homeownership (such as a reverse mortgage) contain incentives designed to overcome possible “emotional” barriers common to older people.
Thus, individuals do not have to leave their homes and can continue to live there until the end of their days. Therefore, the affective bond with the property is maintained during their old age.
We would be facing an option with a high degree of privacy, which does not impact their status or force them to reduce their living space or change their habits.
From the perspective of the lender, the intergenerational mortgage bond allows extending the life cycle of the mortgage beyond the life cycle of the mortgage debtor if his heirs decide to subrogate the debt pending his death.
In addition, although the lenders face a series of risks in reverse mortgages that increase transaction costs, it is still a good business, since the interest rates used in banking practice are around 6%, on horseback between personal loans and mortgage loans, and the cost of deferred annuity insurance between 10% and 15% of the value of the home.
In addition, the reverse mortgage can be a platform for the marketing of other accessory products.
It is true that the very nature of the reverse mortgage makes it difficult for the entity to obtain the same benefit that these products report in traditional amortization mortgages, but nothing prevents the income received by the beneficiary from being used, for example, to contract products investment.
All of this highlights the social and economic need for the reverse mortgage.
- Measures to be adopted to promote the reverse mortgage as a complementary mechanism to the pension system.
We can speak of three market conditions that determine the potential success of heritage liquefaction products.
In the first place, the existence of a significant percentage of homes owned (it is to be expected that in the next decade, the longest-lived people will continue to have a home that they own as a form of savings in general). Second, an adequate level of financial education.
In relation to this, it is expected that, in the medium term, initiatives related to financial education will contribute to a broader and deeper knowledge of this type of product by its potential recipients.
This slow journey of education and learning may accelerate as regulators and the insurance industry become aware of the need to increase the financial decision fundamentals of consumers in general.
Finally, thirdly, the existence of a solid institutional framework must be discussed as an essential condition for the development of an efficient market for products that provide liquidity to assets. In this sense, issues related to i) legislative reforms agreed upon and stable over time, which guarantee the sustainability of the public pension system, ii) the design of tax incentives that catalyze the contracting of these products, and iii) the existence of a Transparent legal framework, with clear rules and endowed with an agile conflict resolution system accessible to the citizen, are necessary conditions for the potential development of these products.
To achieve this objective, greater involvement of the Government in its commercialization would be desirable, both at the legal level, with greater transparency and protection of the applicant, providing this figure with greater legal certainty, solving the doubts and inconveniences highlighted when studying its regulation; as well as at an economic level, with the assurance of the receipt of the income to the beneficiary and the recovery of the debt to the lender, the subsidy of part of the deferred life annuity insurance, the establishment of a tax mechanism that encourages its use, or the financing of part of the remunerative interest.
At the legal level, the executive himself recognizes that there is a lack of regulation for the reverse mortgage. According to the government, it would be necessary to regulate the operation and requirements of these products so that banks were prepared and had an adequate framework in which they could launch these types of products.
The regulation of capital consumption for banks, the risks assumed and transparency are some of the points that should be regulated.
All this could increase the confidence and reputation of credit institutions, which have been seriously damaged after the bad banking practices developed during the real estate bubble.
There is no doubt that the recovery of the real estate sector in our country makes the reverse mortgage a viable alternative to complement a public pension with little appreciation, given the increase in life expectancy and expenses after retirement.
In any case, this depends on the role played by the reverse mortgage in our welfare state, which may or may not entail establishing homeownership as another pillar of the welfare of the elderly at the same level as traditional protection mechanisms: pensions public and private pension plans.
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