Reverse Mortgage Rates and Fees

Inversion of mortgage interest and charges

Fees can make a reverse mortgage an expensive form of borrowing. It is also worth noting that interest rates on reverse construction loans tend to rise. Reverse mortgage and loan crisis exposures After the adoption of Law No 41/2007 of 7 December 2007, the evolution of reverse mortgage ('Hipoteca Inversa') was affected by the present state of the property market in Spain and the global financial crisis. Reverse mortgage is a mortgage designed to stimulate the economy and restore the property market by determining the present value of a normal home by renting it to a secure group, such as persons over 65 years of age or those affected by a strong or large dependency.

Unfortunately, however, due to the present state of the property markets, the continuing decline in value of the housing markets and the increase in longevity, these targets will not be met. With all these elements, the lending of a loan is complicated and limited, as it is secured by a mortgage of this type.

Besides the above -mentioned problems- it is also necessary to mention the usual provision that is generally found in this kind of funding, according to which a bank cannot demand reimbursement of the credit until either the real estate pledged as a security is resold or the last beneficiary of the credit is dead.

The only obstacle to the granting of such funding by the usual provision is for the banking sector, which is faced with a great deal of insecurity when it comes to determining the expected date on which they will be able to obtain reimbursement of the amount disbursed.

It is also common to set a time limit after the decease of the borrower in which the successors of the pledged assets can determine whether they can repay to the bank the amount owed by the late borrower to the late borrower, either by selling the aforementioned assets or, alternatively, if they declare their willingness not to resell the assets, by taking over the debts taken over by the late borrower.

It could also mean a revision of the deadline for repaying the debt and of the financial arrangements applicable to the late beneficiary. Irrespective of this, we should also say that even if the term set in the document for the reimbursement of the credit is fixed, the bank may face other extra issues related to the estate, such as the legacy's invalidity or enforceability, which could be terminated by one of the inheritors.

There are also other mortgage market-related exposures, such as the value of the valuation of a real estate asset at the time the mortgage is issued and its potential amortisation at the end of the term of the liability. In fact, this could result in the value of the late debtor's estate not being sufficient to meet the entire amount of the bancassurance, with the added drawback that in this case the company can only take action against the debtor's estate.

Neither could the company take any action, not even in a subsidiarily fashion, against the heirs' assets. It should also be pointed out, together with the above, that in most cases the interest rates on these mortgages are determined on the basis of a set interest rather than a floating interest rates, which, together with the insecurity and the haphazard character of fixing the expiry date of these mortgages, would make it more cumbersome for a bank to lend money with these features, as it would not be able to fix the possible floating interest rates increases during the life of the agreement.

These factors, together with the global financial crisis, are hampering the attainment of the desired reverse mortgage effect and objectives.

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