Reverse mortgage

A reverse mortgage is a mortgage that adults who already own a home can take out. This mortgage is called reverse because it operates in reverse to a regular mortgage.

Continuing the full article and for those who prefer video:

Table of contents

Reverse mortgages are suitable for:* **Homeowners aged 62 and over:** This is the minimum age requirement for most reverse mortgage products. * **Those who own their home outright or have a small mortgage balance:** To qualify, you generally need to have a significant amount of equity in your home. * **Individuals who want to supplement their retirement income:** Reverse mortgages can provide a stream of income to help cover living expenses, healthcare costs, or other financial needs during retirement. * **People who want to stay in their home:** Unlike selling a home, a reverse mortgage allows homeowners to continue living in their property. * **Those who want to avoid monthly mortgage payments:** With a reverse mortgage, you generally don't have to make monthly principal and interest payments as long as you live in the home and meet the loan obligations. * **Individuals who need funds for specific purposes:** This could include paying off existing debts, funding home improvements, covering medical expenses, or leaving an inheritance.

Who gives reverse mortgages

Anyone who is 60 years or older, owns a home, and has equity in that home can potentially receive a reverse mortgage.

Reverse mortgage interest

How to receive the money

Should you get a reverse mortgage

Standard mortgage Taken as part of a home purchase process. Let's assume there's an apartment we want to buy. We've signed a purchase agreement, paid part of the apartment's cost from our own funds, but we don't have all the money to complete the transaction. At this stage, we'll take a loan from the bank, and with this loan, we will pay the money to the apartment sellers. The loan will be called a mortgage because we've mortgaged the apartment being purchased, meaning the apartment will serve as collateral for the bank's funds – if we don't pay the monthly mortgage payment, the bank can take the apartment from us. After taking out the mortgage, we will pay a certain monthly payment until, at the end of the mortgage period, those monthly payments have zeroed out the debt, we owe nothing to the bank, and the mortgage is removed from our apartment.

A reverse mortgage works in reverse. – We already own an apartment but we need money for some reason other than purchasing the apartment, which as mentioned is already ours. In this situation, we can mortgage the apartment and receive a sum of money in our account. We do not usually pay a monthly payment, or we only pay the interest without the principal.  And after we pass on to a better world, The Heirs Ours The debt will be settled from their own resources or by selling the apartment pledged for the reverse mortgage. In other words, instead of being homeless people who become homeowners through a regular mortgage, with a reverse mortgage, we are homeowners who take out a mortgage, and at the end of the mortgage term, we will generally sell the apartment to settle the mortgage.

Who is a reverse mortgage suitable for?

With the rise in housing prices in recent years, a situation has arisen where some elderly people own assets worth several million shekels – their residential apartment. While these individuals are ostensibly millionaires, some did not contribute to their pensions and therefore face significant difficulties in their daily lives. A reverse mortgage can be one such solution. In this arrangement, the lending institution provides a monthly annuity instead of a lump sum.

Additional options for utilizing this product include helping children purchase their own apartment, buying an additional apartment for investment, or paying a down payment for assisted living instead of making a move that can't be undone, like selling a primary residence. In fact, with the money received through a reverse mortgage, one can do whatever they please. However, it's not necessarily advisable to do whatever one pleases.

Who can provide a reverse mortgage?

Until recently, only insurance companies could offer reverse mortgages. The reverse mortgage product contradicts a range of Bank of Israel directives, so the market was left to insurance companies, which are not subject to Bank of Israel regulations. There was a specific exception with a workaround to the directives that Mizrahi-Tefahot Bank found. In October 2022, the Bank of Israel announced that it was working on changing mortgage lending directives so that banks could also offer reverse mortgages.

Anyone who is 60 years or older, owns a home, and has equity in that home can potentially receive a reverse mortgage.

The basis for a reverse mortgage is The Levites are not obligated to return it. A reverse mortgage is essentially a loan of a certain amount that the borrowers are not obligated to repay, and its termination date is not known in advance by the lender. That is, if we take out a regular mortgage, we know that we will have to repay it within, for example, 20 years. In a reverse mortgage, as mentioned, the settlement for closing the mortgage is not with the borrowers but with their heirs, after their death. The last borrower. Since no person knows the day of their death (and naturally, neither does the lender), there is no defined end date for a mortgage.

The financial situation of the borrowers is of no concern to the insurance company (within certain limitations) as no monthly mortgage payments are required for this loan.

However, because the borrowers are not required to repay the mortgage on the one hand, and the unpaid interest accumulates on the other hand and increases the debt with each passing month, a framework of Balloon loan, The insurance company does not want to reach a situation where the debt amount exceeds the value of the asset.

In order to avoid a situation where the total debt exceeds the value of the apartment, the insurance company limits the loan amount as a percentage of the apartment's value based on the borrower's age. This sentence is complicated, but I believe the table above from the loan terms of Clal Insurance Company will help us:

A borrower aged 60 (based on the younger spouse) will be eligible for a loan of up to 151% of the property’s value. A borrower aged 90 (or older) will be eligible for a loan of up to 501% of the property’s value. And so on.

Additional conditions for obtaining a mortgage:

• Since the accounting will ultimately be with the borrowers' heirs, usually their children, the insurance company will seek to inform them of the developing loan agreement.
• In some cases, the insurance company will ask borrowers to provide a doctor's note confirming they are mentally fit to sign the loan agreement.
• The loan agreement will be signed at the office of a legal advisor on behalf of the borrowers. This means the insurance company requires the borrowers to hire a lawyer on their behalf, and this lawyer will review the agreement and sign off on it, confirming that it has been properly explained to the borrowers.

These three conditions are intended to prevent future complaints from the heirs, as if their parents did not understand what they were signing or any other claims.

Reverse mortgage interest

Naturally, every lender offers loans at different interest rates, and interest rates vary over time. To provide a figure that can be used for comparison—regardless of when this article is read—we can use “prime + 4.51%” as a benchmark, which is similar to the interest rate on a general-purpose bank loan.

How to receive the money

The loan funds can be received as a lump sum, similar to a regular mortgage. A lump sum is suitable for those who want to help their children buy an apartment, move into assisted living, or make an investment. Of course, it is also suitable for those who have gotten into financial trouble.

It is possible to receive the loan in monthly amounts as well. Let's say we set a monthly amount of 5,000 shekels. Each month, I will receive 5,000 shekels and the debt will increase accordingly. This is suitable for someone who, for some reason, has not deposited enough funds into their pension fund and now needs supplementary monthly income to subsist. This is also suitable for someone who wants (or has ended up in) early retirement and whose pension fund has not yet started paying them an annuity. For example, someone who left their job at age 60 but will only start receiving their pension at age 67.

Is a reverse mortgage worth it?

Every week, I receive many "should I" questions of various kinds. Should I invest in X? Should I take out Y mortgage? Should I do Z? What these questions have in common is the questioner's assumption that there is a textbook answer to their question. This isn't surprising. The last time most of us were faced with questions outside our current professional scope was truly in school or in a degree program after school. Our learning environment was characterized by some authority figure who knew the right answer (and based on their knowledge, also graded our answers). In reality, when it comes to financial decisions, beyond the general statement of "earn more than you spend," it's almost impossible to determine for any decision whether it is "correct." You can determine if a decision is suitable for someone after knowing all of that person's data.

In this article, I've tried to give you tools to know if a reverse mortgage is right for you. Naturally, the article is written in a very general way because I don't know who will read it or what their data is.

If we look only from an economic perspective – meaning, how we will now receive, let's say, half a million shekels and also leave the largest possible inheritance, then a reverse mortgage will likely be a less good solution than selling the current apartment, purchasing a cheaper apartment, and with the difference of 500,000 shekels, leaving it with us. If this answer seems strange or unusual to you, then you understand the complexity. What do you mean by buying a cheaper apartment? My family and friends live in Petah Tikva, and you suggest I move to Afula to buy a cheaper apartment? I live in a 4-room apartment, and you suggest I move to a 2-room apartment? A large part of the joy of my life is the days when the grandchildren sleep over at my place. Will a reverse mortgage create tension between my heirs after my death? And many other questions.

For any significant financial decision, I recommend professional consultation. Someone who will listen to you for an hour or two and help you make the decision. Suitable consultants are those who, on the one hand, have the ability to perform an economic analysis of different alternatives, and on the other hand, have life experience and the ability to listen, empathize, and understand a complex reality in order to integrate the economics with other considerations. Of course, the condition for consultation (as opposed to sales) is that the consultant receives the same compensation whether they recommend taking out the mortgage or not.

Closing note

All of the above is at a principled level. In different companies and at different times, the data can change. As mentioned, consult with professionals.

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As always, I'd be happy to receive any comments or questions. You can and should add comments below. I read every comment. You can write to me directly here – rimon@effm.co.il or call me.

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