Many millions of people in Germany own their own home and thus have a value that is independent of inflation and later leads to more money being available in retirement, so that no rent has to be paid. Nevertheless, it is not infrequently the case that on the one hand there is a property and thus a large asset, but on the other hand there is basically a daily lack of liquidity because the pension is quite small. In such a situation, more and more real estate owners are interested in a so-called real estate annuity, also called reverse mortgage.
In our article we would like to go into more detail about what such a reverse mortgage is, what distinguishes the real estate annuity, what the advantages and disadvantages are and what else you should know about this topic if you are affected by having a house on the one hand, but lacking liquidity in everyday life on the other hand due to an unsound annuity.
What is the real estate annuity about??
In common usage, the two terms real estate annuity on the one hand and reverse mortgage on the other hand are used synonymously. Another name for the reverse mortgage is reverse mortgage, because in this case a debt-free property exists, but a loan is still taken out. With the classical mortgage it is naturally in such a way that this serves as credit security, but the appropriate real estate is not yet paid off and thus not debt-free.
The real estate annuity as such is a financial service offered by certain financial service providers. In detail, the reverse mortgage is ultimately a loan for which the respective property is the collateral. Accordingly, the reverse mortgage at this point does not differ from a traditional real estate loan, because there, too, a loan is granted and the corresponding property is used as collateral.
How does the reverse mortgage work??
Typical of the reverse mortgage and how it works is that the property owner builds up more debt year after year. This, in turn, is also the reason why it is called a reverse mortgage, because in the case of the ordinary real estate loan, the debts naturally become progressively lower and lower. The reverse mortgage becomes due when the owner of the property dies. Then, with most real estate annuities, there are several options between which the real estate owner or. after whose death the appropriate heirs can decide, namely:
- Follow-up financing through real estate loan
- Repayment of the mortgage
- Selling the property
In the first two cases remain resp. the heirs become owners, in that the reverse mortgage is repaid in full as a loan or a follow-up financing takes place in the form that on the one hand an ordinary real estate loan is taken out and thus also the reverse mortgage is repaid. In the third option, the heirs choose instead to sell the property. This would of course also take care of the corresponding reverse mortgage.
What the advantages of a reverse mortgage?
As a real estate annuity, the reverse mortgage has both advantages and disadvantages, which you, as the owner of a property, should definitely know in advance before delving deeper into this topic. A first advantage of the real estate annuity is, of course, that you receive immediate liquidity, thus providing you with a sufficiently high income for many years to come. In addition, the reverse mortgage does not usually restrict the right to sell the house at any time.
This can be important in old age, for example, when a smaller apartment may need to be rented or the property owner may have to move into a nursing home. In addition, there are other advantages that can make a real estate annuity or a reverse mortgage more attractive. Reverse mortgage can distinguish, namely:
- Planning security
- Loan is paid out tax-free
- Lifelong right of residence for homeowners
What are the disadvantages associated with the real estate annuity?
With the reverse mortgage there are not only disadvantages, but the disadvantages should absolutely find a consideration. This includes, for example, that a reverse mortgage is generally relatively expensive. On the one hand, the loan interest rate is usually (significantly) higher than for an ordinary real estate loan. On the other hand, you will rarely receive more than 40 to 50 percent of the current market value of your property paid out as a loan.
This, in turn, is due to the often lower property valuation, which can additionally be a disadvantage of the reverse mortgage. Also disadvantageous can be the condition that a slightly higher real estate annuity is only possible if the property is in a good location. The house should also be completely debt-free.
You should claim the real estate pension only if you have liquidity needs. In fact, the reverse mortgage is relatively expensive, so it would make little sense to take advantage of it despite having sufficient liquid assets
Who is the target group of a real estate annuity?
Real estate annuities 1 Real estate annuity – https://www.verbraucherzentrale-niedersachsen.en/topics/finance/real-estate-retirement-what-it-means-to-reverse-mortgage – retrieved on 15.11.22 and reverse mortgages are of interest to a very special target group, which the relevant financial service providers naturally often address very consciously. This form of financial service is not relevant for all real estate owners who do not have any additional liquidity needs because, for example, they get along well with their state pension in addition to a private pension plan. The reverse mortgage is also not suitable for property owners who have liquidity needs but still have a current mortgage or land charge because the property is not yet debt-free.
Therefore, it is especially the following property owners who represent a target group for financial service providers offering a real estate annuity:
- Debt-free property available
- Liquidity needs
- Real estate owners between 60 and 70 years old
- No or only small, other assets and credit balances available
Ultimately, the target group for a reverse mortgage can therefore be summarized that on the one hand it must be owners of a property that is as debt-free as possible and on the other hand there is a need for liquidity because the previous income is not sufficient.
Example of real estate annuity
In order to give you a better idea of the reverse mortgage, especially since the previous explanations are relatively abstract, we would like to carry out a sample calculation from practice towards the end of our contribution. There you can see approximately from the corresponding values, which costs arise with a real estate annuity and with which monthly payment you can count at all. Our example is accordingly as follows:
- Current market value of the property: 300.000 Euro
- Risk discount: 80.000 Euro
- Residual value of your house: 220.000 euros
Almost all financial service providers usually make a risk deduction from the current market value of the property, which often takes between 20 and 40 percent of the property value. This in turn results in the residual value of the property, which in turn forms the basis for the loan in the form of the reverse mortgage.
The second step is to determine the possible monthly pension on this basis:
- Loan term: 20 years
- Interest rate on the loan: 4.5
- One-time payout: 100.000 Euro
- Alternative pension: 580 euros per month
With some real estate annuities, the corresponding customers have the option of choosing between a one-time payment and a monthly annuity payment. However, the typical real estate annuity provides for the regular payment, while the one-time capital sum is rather a rarer variant.
Are there alternatives to the reverse mortgage?
The question of an alternative to the reverse mortgage assumes, of course, that you have a property on the one hand, but you lack liquidity in old age. If both points do not apply, the real estate pension makes no sense anyway. How would it look, for example, with an ordinary real estate loan? This would be paid out in one lump sum, but of course you could invest the loan amount and annuitize it, for example, through a payout plan.
The problem, however, will be that most banks will no longer give customers a (larger) loan after a certain age, for example after 67 years of age. However, that's usually when the additional capital needs arise, namely with retirement age. Thus, the ordinary real estate loan is usually not an option. Basically there would be then only the alternative on a secondary activity in the pension age. In the financial range however the real estate pension is actually often the only alternative