Many people may be worried about the issue of retirement funds, which is often talked about in the news recently. Under such circumstances, the "reverse mortgage" is attracting attention. This is a product that allows you to borrow money for retirement using your home as collateral while continuing to live in your home.
This product is also recommended for those who want to enrich their post-retirement life, so if you have a house as collateral, it is one way to consider it as a source of funds to live a long post-retirement life.
Also, due to problems such as aging of the house and inheritance, I think there are some people who are considering moving or renovating after they are old. In that case, there is also an option called "reverse mortgage type home loan".
Here we explain how each works. There are advantages as well as disadvantages, so make sure you fully understand them before considering them.
What is a reverse mortgage? Basic knowledge to remember
First, let me explain how a reverse mortgage works. A reverse mortgage is a system in which a borrower borrows money to live in their home as collateral, continues to live in their own house, and when the borrower dies, disposes of the collateralized real estate and repays the borrowed money. In other words, it can be said that it is a loan system for the elderly.
Literally translated, it means "reverse" and "mortgage". Mortgages are generally paid back monthly in a lump sum until the balance of the loan is exhausted. However, a reverse mortgage is a mechanism that repays the balance of the borrowed amount at the end of the month or in a lump sum. That's why it's called "Reverse".
Reverse mortgages are characterized by being handled by social welfare councils and financial institutions in each prefecture. Depending on which reverse mortgage is used, the use of borrowing, the loan limit, and the target property will differ.
For example, reverse mortgages handled by financial institutions include those that are provided in partnership with the Japan Housing Finance Agency and those that are provided independently by financial institutions. In reverse mortgages handled by financial institutions, only the interest is paid every month while the borrower is alive, and the principal is repaid in a lump sum by the heir who sells the house after the borrower's death.
On the other hand, reverse mortgages handled by the Social Welfare Council require the heir to repay the borrowed principal and interest when the contract is terminated due to the borrower's death or other reasons. In both cases, the monthly payment amount can be reduced, so you can expect to make effective use of limited funds in your retirement life.
After retirement, many people will be able to manage their daily living expenses with their pension income. However, if there are remaining mortgage payments after retirement, there is concern that it will be difficult to repay the mortgage. Therefore, it is possible to refinance from a mortgage to a reverse mortgage.
You can also expect to reduce the monthly repayment amount by changing from repayment of "principal + interest" to repayment of "interest only". Although it depends on the financial institution, the maximum loan amount is often around 100 million yen, so you can consider using it in any way. If you want to keep your home as an asset, you can repay the principal during the loan period.
Advantages and disadvantages of a reverse mortgage
Before considering a reverse mortgage, it's important to weigh the pros and cons. Some of the main advantages and disadvantages of reverse mortgages are:
Advantages of a reverse mortgage
1.Reverse mortgages offered by financial institutions only pay interest each month, so it is possible to reduce expenses during retirement (a regular mortgage has a monthly repayment of principal plus interest). However, for reverse mortgages handled by the Social Welfare Council, the principal and interest will be returned at the end of the contract due to the death of the borrower.
2. When the borrower dies, the principal can be repaid either in cash or by selling the house (it is also possible to repay early while the borrower is still alive).
3. You can borrow funds for retirement while continuing to live in your home, using your house or land as collateral.
4. Many financial in
stitutions allow the spouse to take over the contract if the borrower dies, so you can avoid the risk related to the spouse's residence.
5.By leaving a large amount of funds such as retirement allowances and savings, you can delay the decrease in retirement funds while securing a living environment.
Disadvantages of a reverse mortgage
1. The longer you live, the more risk you have of spending up to your original loan limit (the loan term is generally until the borrower's death)
2. If the value of land and buildings declines during your life, there is a risk that the loan limit will be revised
3. There is interest rate fluctuation risk because only floating interest rates
What is the difference from leaseback
Leaseback is a service that allows you to continue living in the same property after selling the property you live in and receiving the payment. The property you sell is treated as a lease (rental), so you can continue to live in it while paying the rent.
A reverse mortgage, on the other hand, differs from a leaseback in that the mortgage is used as collateral while the property is still owned. In addition, while leasebacks are paid in a lump sum, reverse mortgages allow periodic borrowing according to the upper limit.
What is a reverse mortgage fund used for?
Depending on the institutions that handle reverse mortgages, the use of funds may be limited, but the main uses of funds are as follows.
1. Post-retirement living expenses and medical/nursing care costs
2. Lump-sum payment for nursing homes
3. Home renovation costs
4.Payment of mortgage balance
5. Utilization for hobbies and leisure
6. Lifetime gifts to children
Of these, reverse mortgages provided by the social welfare councils of local governments are intended to support independence, so they can only be used for post-retirement living expenses. On the other hand, the Reverse Mortgage provided by the Japan Housing Finance Agency provides five housing-related measures (construction/purchase of the housing in which the person resides, renovation, lump-sum payment for housing for the elderly, refinancing of the housing loan, housing for children's households, etc.). Funds) only and cannot be used for living expenses.
Reverse mortgage products provided independently by financial institutions tend to be free in principle, except for business funds and investment purposes. However, in recent years, there has been an increase in the handling of "reverse mortgage-type housing loans" as a new type of reverse mortgage independently provided by financial institutions. Next, let's take a closer look at the "Reverse Mortgage Mortgage".
What is a reverse mortgage type mortgage?
Advantages, Disadvantages and Precautions
What kind of product is a reverse mortgage type mortgage?
Overview
A reverse mortgage loan is a product based on the reverse mortgage scheme of the Council of Social Welfare and the Japan Housing Finance Agency, but with a wider range of borrowing conditions and usability.
One of the conditions for reverse mortgages handled by the Council of Social Welfare is that, in principle, all residents of the residence must be over the age of 65 (*).
(*) Tokyo Metropolitan Council of Social Welfare "Introduction to Real Estate Collateral Loans for Living Funds"
On the other hand, depending on the financial institution, reverse mortgage loans are generally aimed at people over the age of 55 or 60. However, there are places like Resona where you can apply from the age of 50.
In addition, the products of financial institutions are characterized by their wide range of uses. It can be used not only for living expenses after retirement, but also for relocation funds, so it is convenient to use when considering a second life. For example, it can be used to say, ``I want to move to a smaller apartment because the house is too large after the child leaves the nest and there are only two senior couples.''
In addition, it can be used in cases such as "My child has purchased a home, so I have no one to take over the home. I don't know how to dispose of the house after I die."
In this way, while it has one aspect of a mortgage, it also has the advantage of a reverse mortgage, in which only the interest is repaid monthly during life and the principal is repaid after death.
merit and demerit
With a reverse mortgage, you only have to sell your home and pay off your debts when you die, giving you more flexibility in your post-retirement life. This is because while it has an aspect of a mortgage, it also has the benefits of a reverse mortgage, in which only the interest is repaid monthly while you are alive and the principal is repaid after you die.
However, by using a reverse mortgage, you can enrich your life after retirement, but on the other hand, it is also true that there are many people who are concerned about the burden on the heirs. If the value of the collateral property falls, there is a risk that even if you sell your home, you will not be able to repay it, and in that case the heir must repay the remaining debt.
Depending on the financial institution, there are two types of reverse mortgage loans: recourse and non-recourse. The “recourse type” is a type in which the heir must bear the remaining debt of the mortgage loan, while the “non-recourse type” is a type in which the heir does not have to repay the remaining debt of the mortgage loan.
Therefore, non-recourse loans generally have higher interest rates. The interest burden during life tends to be higher in the non-recourse type than in the recourse type, but considering the heirs, the non-recourse type can be said to be one of the options.
6 points to note
In the case of a reverse mortgage type mortgage, let's also keep in mind the following six points.
1. There are often restrictions on the area of the property that can be used
2. Because the interest rate is variable, the monthly interest repayment amount is easy to change (If the repayment amount increases, there is a risk of putting pressure on the household budget)
3. Group credit life insurance cannot be subscribed (regular mortgages can be subscribed, but reverse mortgage type mortgages are not eligible)
4. Repayment may be required in the middle depending on the trend of real estate value as collateral
5. There are cases where the contract expires during life and the principal and interest must be repaid in a lump sum.
6. Condominiums are less likely to apply for reverse mortgages
Of these, the most important thing to be aware of is the risk of 4, "You may need to repay in the middle."
Although it depends on the financial institution, in many cases the loan limit is set as low as 50 to 60% (*) of the collateral appraisal value, and the appraisal is reviewed every few years. At that time, the loan limit will also be reviewed, but if by any chance the amount borrowed so far exceeds the loan limit, it will be necessary to repay the excess amount or the entire balance.
To minimize these risks, be careful not to borrow up to the limit in advance.
Also, be aware of 5, "Cases where the principal and interest are repaid in a lump sum while you are still alive." This is because some reverse mortgage loans have a fixed term to reduce the risk of long-term repayment.
Originally, a reverse mortgage type mortgage is a mechanism that repays the principal with the sale price of real estate after the policyholder dies. However, if the contract period is set, there is a possibility that the principal and interest must be repaid in a lump sum during the life of the contract holder.
To avoid such risks, choose a loan whose contract end date is set to "the date the policyholder died" so that you do not have to make a lump sum payment while you are still alive.
In addition, let's also pay attention to 6, "Condominiums are difficult to apply to reverse mortgages." This is because the valuation of the land is the main collateral for a reverse mortgage mortgage.
In the case of a “compartmental ownership building” where each room is owned by a different owner, such as a condominium, the ownership of the land for each owner is reduced in the first place. Furthermore, it is difficult to apply a reverse mortgage because the ownership of the building and the equity of the land cannot be disposed of separately.
(*) Japan Housing Finance Agency “Housing Loans from Age 60 [Re-Birth 60]”
Reverse Mortgage Mortgages are recommended for:
“Reverse Mortgage Mortgage” is recommended not only for those who are worried about their retirement funds, but also for those who want to “live the life they want after retirement.” In particular, if you are one of the following, why not consider using a reverse mortgage type home loan?
People who are worried about their retirement funds
Some people may have a house with a high asset value and have no problem finding a place to live, but some people may be worried about the money they can use after retirement because they have few savings.
For example, the Social Welfare Council's reverse mortgage system is conditional on the income of household members being as low as that of households exempt from municipal tax, so it seems that many people cannot use it. For this reason, reverse mortgage loans are suitable for those who want to increase their living expenses while continuing to live in their own home, or who are worried about their retirement funds.
People who have retirement funds but want to keep them for emergencies
Some people have their retirement funds ready, but want to have spare funds in case of an emergency. There are various reasons such as "I want to enjoy my leisure time such as traveling" and "I want to secure funds for when I am sick or need nursing care." By using a reverse mortgage loan, you can reduce the decrease in retirement funds.
People who have no heirs and want to live a fulfilling life without leaving their home
If you have no heirs or don't need to keep your home, you can use a reverse mortgage loan to focus on enriching your retirement life.
However, if you have at least one child, be sure to get their consent before taking a reverse mortgage.
This is because with a reverse mortgage, you will have to repay the loan in full by selling your home after the debtor's death. If you have children living with you, you may lose your residence.
People who have difficulty repaying their mortgage balance
As mentioned above, reverse mortgage loans can also be refinanced from home loans. In particular, if you have a mortgage that will remain after you retire, or if you are considering a lump sum repayment with your retirement allowance, you can reduce your monthly repayments by refinancing or secure your retirement allowance as an old-age fund.
In addition, if you choose a reverse mortgage type home loan that is set for age 50 or older, you will be able to start reviewing your household finances at an early stage.
In this way, by refinancing from a home loan, you can use the decrease in expenses for life after retirement to compensate for living expenses and leisure time.
People who are thinking of eventually living in a nursing home
Some people may prefer to live in a nursing home with carers rather than at home, perhaps because their children are far away. However, nursing homes are generally expensive. If you use a reverse mortgage loan, you can also use the money you have collected to pay for your move-in costs.
Also, some people sell their homes to move in, but some people may want to keep their homes so that they can get together a few times a year. There are various other reasons, but it is suitable for people who say, "I don't want to give up my house for the rest of my life" or "I'm thinking of living in a nursing home someday."
Ideally, people should be able to live out their old age as long and as actively as possible, but given the current social situation of a declining birthrate and an aging population, there are concerns that a long lifespan could become a financial risk. Once you have a firm grasp of how reverse mortgages work, their advantages and disadvantages, why not consider using them wisely for a fulfilling post-retirement life?
Frequently Asked Questions on Reverse Mortgage Loans
Here are two frequently asked questions about reverse mortgage loans.
Will my debt be passed on to my children?
With a non-recourse reverse mortgage loan, even if the policyholder or the spouse who took over the contract passes away, the remaining debt will not be passed on to the child.
In addition, even if the sale price of the collateralized real estate falls short of the principal, the child will not be billed. If the sale proceeds exceed the principal, a portion of the sale proceeds will remain with the child.
However, it should be noted that temporary income will be generated if repayment of the shortfall is unnecessary, and capital gains will be incurred if part of the sales proceeds remains.
How long will interest be paid?
Interest payments continue for life. However, unlike a regular mortgage, you don't have to repay the principal during your lifetime, so you can keep your monthly payments down. It can be said that it is an advantage that you can manage your household budget while leaving your funds.
Also, if you avoid products that may expire during your lifetime, you will not be required to repay the principal or sell your home during your lifetime.
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