Reverse mortgage

The process of population ageing, which means an increase in the number of older people within a population, is one of the biggest issues in the 21. century. According to the Statistics Poland projection, the share of people aged 60 and more in Poland will equal 29.9% in 2030 (whereas in 2021 it was 25.7%). Moreover, in 2050, 40.4% of the entire population will be older people. For that reason, the problem of ensuring adequate retirement pensions due to the growth in the number of pensioners will become noticeable in the future. The financial situation of Polish pensioners has been steadily worsening, not to mention the fact that many of them are lonely without any support from the loved ones. In this context, these people are looking for opportunities to obtain additional financial resources. One of such solutions available for homeowners might be reverse mortgage that is extremely popular in the US and UK.

How reverse mortgage works

Reverse mortgages are classified as equity release services (ERS) that allow you to unlock the cash tied up in your property to produce an income stream. ERS are dedicated to older people and seniors and as mentioned in Study on Equity Release Schemes in the EU they must:

• be a financial service,
• be a source of liquidity for the future,
• contain a strong entitlement to remain in occupation of the property,
• base the repayments solely on the market value of the property.

There are two forms of ERS schemes: the loan model and the sale model.

The loan model, which is also known as “lifetime mortgage”, enables homeowners to borrow money against the value of their property. The borrower remains the owner of the property until the end of his life, and after his death, the bank takes over ownership and therefore it can sell the property. In this case, the amount lent is repaid by the sale proceeds of the property. The loan model is mostly offered by financial institutions.

The sale model involves the sale of the property at the moment of signing the agreement, which means the immediate loss of ownership title to the estate. The seller retains only his right to live in the property and receives extra payouts until the end of his life. The sale model is offered by mortgage funds.

These models can impose different legal consequences, so it is very important to understand how they differ from each other.

Reverse mortgage pros and cons

The main advantage of reverse mortgage is extra steady stream of income that can be an addition to the pension. The borrower can freely dispose of this extra income, for example, it can be used to cover rising costs of healthcare or generally to improve the quality of life on retirement. Moreover, it may be a great solution for people with no family or friends that could inherit their estate. Extra payouts that supplement homeowner’s income can be treated as a return of the money spent on the property. Unlike traditional mortgage loans, where eligibility is based on creditworthiness, reverse mortgages are much more accessible to older people (who often have a poor credit rating). Furthermore, the borrower remains in occupation of the property, and additionally, in the loan model, he is also the owner of it until the end of his life.

In spite of many benefits offered by the reverse mortgage to borrowers, this instrument has some drawbacks. Not anyone can take out a reverse mortgage loan because it is only available for people who are homeowners. Another disadvantage is that the reverse mortgage loan amount is estimated by financial institution and it can be differ from homeowner’s expectations (total loan amount is usually between 30% to 60% of the property’s appraised value). Reverse mortgage also complicates things for the borrower’s future heirs. If they want to keep the home, they will need to pay the full loan balance.

Reverse mortgage in Poland

In Poland, the legal basis of the loan model is the Reverse Mortgage Act of October 23, 2014 (uniform text – Journal of Laws, 2023, item 152, as amended). In practice, this model does not exist on the Polish market nowadays. The Act regulates only basic rules and therefore both borrowers and lenders must deal with many issues on their own. In this case, this situation discourages them because of many risks associated with it.

The sale model is offered on the Polish market, but there is no separate act, so it is based on life annuity contract regulated by civil law that consists of the transfer of the right to the property to the buyer while establishing for the seller the right to live in the property. Nevertheless, among the Polish population the sale model is not trusted and popular.

Therefore, even the fact that the number of older people in Poland is increasing, the majority of financial institutions are not interested in offering this product because of the high risk and what is more, life annuity contracts are still mostly concluded through natural persons.

Summary

As a result of growing demographic problems and the fact that the social insurance pensions may be insufficient for dignified life in the future, more and more people have been thinking about taking out a reverse mortgage, which enables to obtain additional financial resources. In spite of many benefits, it also carries many risks. The existing Polish Reverse Mortgage Act regulates only basic rules, so the loan model does not exist there. The sale model is offered in Poland, but is only regulated by civil law and that makes it hard to control, so finally this model is not widely trusted by clients. For these reasons, the Polish reverse mortgage market is not as big and popular as the US and the UK ones.

Karolina Sawczuk
Junior Specialist in Research and Market Service