The principle of a real estate pension is always the same. Homeowners can sell their homeownership (home or apartment) to an insurance company. In return, the vendors receive a lifelong right to live in the property as well as a monthly payment or a one-time payment.
With the duration of the real estate pension, the registered land charge increases in favor of the bank or the insurance company. With the death of the borrower or the move to a retirement home, the property becomes the property of the lender. Banks usually pay up to an age of the applicant of 95 years in the payment of the real estate pension.
The reverse mortgage as a basis
A real estate pension is based on the reverse mortgage loan model, which is popular in North America. The term is a direct translation from English. The mortgage form is called “Reverse Mortage”. However, this is not really a “reverse mortgage”.
In this country, the term real estate pension has become naturalized for this form of real estate retirement. Unlike a normal mortgage, the debt burden increases with the duration of the loan product. The limit for the mortgage lending value is usually 50 to 80 percent of the market value of the property.
For whom is a real estate pension worthwhile?
A real estate pension can be worthwhile, especially if retirees are childless and their own pension is not sufficient for the desired standard of living. Likewise, this form of pension comes into question when the self-inhabited house is no longer fully used anyway.
Basically, the real estate pension is not automatically eliminated when pensioners have children. Thus, this loan can also be used to finance new buildings or conversions. This gives parents the opportunity to financially contribute to the purchase of their children’s property at retirement age.
Forms of capital payment
The capital from a real estate pension is paid to the borrowers in different ways.
- The property is sold to the bank or insurance company. In return, the borrower receives a lifetime, monthly pension.
- The property is charged only with a mortgage loan, which is repaid at a specified time or after the death of the owner. The loan amount is used for home repairs or for the payment of a lump sum in a life insurance policy.
Options for heirs
When concluding a real estate pension, it can be agreed that, if the homeowner is deposited early, a pension guarantee for the heirs is given.
If a mortgage is taken on the property and the borrower dies, the heirs do not have to assume the mortgage debt. However, they have the opportunity to settle the debt in order to own the property.
Consider the time of repayment
Who takes up a reverse mortgage, should first think carefully about what time he chooses to repay the debt. If the repayment is made during his lifetime, it is important that there is enough capital to settle the debt for that moment.
Preliminary considerations regarding future heirs
Borrowers should be well prepared when to use a reverse mortgage and how to repay the mortgage. These considerations are important so as not to burden future heirs.
These conditions exist
To apply for and receive a real estate pension, the borrower must first be a homeowner. In addition, other conditions apply:
- The applicants must have reached the legal retirement age of 65 years. For some providers, however, the real estate pension can already be used at the age of 60.
- The property must be in perfect condition. Many providers require borrowers to maintain and maintain the property. In this way banks want to avoid a possible loss of value.
- The loaned property must be paid off at best. Some banks, however, offer the real estate pension even with a low residual debt.
- If a real estate pension is taken, the property usually has to be worth so much that a minimum pension of 150 euros can be paid.
One advantage of real estate pensions is that borrowers do not have to have a particular credit rating. This is not necessary as the property serves as security. The bank or insurance company enters a land charge in the land register after conclusion of the contract.
Important aspects of the degree
If you want to take out a real estate pension from an insurer or a bank, you should first look for a suitable provider. In Germany, the offer is still quite manageable, because this form of credit has not spread so much.
Once the provider has been found, it is important to estimate the value of your own property. Because of this value depends on the possible amount of the subsequent pension payment. In order to appreciate the value of the house, an appraiser should be called. Some providers pay its costs when it comes to a contract.
On the basis of the determined real estate value, the bank or the insurance makes a concrete offer for a real estate pension. Here all key figures should be strictly observed. It is important, for example, that the contract establishes a right of residence or what rights future heirs have. After all, it is a long-term project that causes the borrower to lose more and more of his former ownership in favor of a pension.
Notary fees as incidental costs
Since a land charge is entered on the property when applying for a real estate pension, a notary must be called in. The costs of the notary are usually listed in the ancillary costs of the financial product.
To consult with trusted persons
When talking to providers, trusted persons should always be consulted.
How is the real estate pension taxed?
The payments that are paid out to the borrowers monthly via the real estate pension offer tax benefits. Thus, only the income value is taxed at the real estate pension. This refers to the net income generated by the income from the property. Since there is hardly any income when the property is leased, there are also few or no taxes to be paid.
Thus, the real estate pension in comparison to a disbursed life insurance tax advantage of advantage. Tax benefits are not available to consumers for the payment of life insurance in the form of a pension until it has been saved for at least twelve years.
Property pension makes sense as a pension?
How much capital is paid out via a real estate pension varies from provider to provider. In principle, however, never the complete value of a property in the form of a regular payment is taken into account. As a rule, the total amount of the real estate pension is based on 50 to 80 percent of the market value of the mortgaged property. However, some providers pay only a maximum of 35 percent of the property value.
To calculate the real estate pension, various factors must be considered. On the one hand, it matters how long the recipients of the monthly payments will still live in this property. On the other hand, the market value of the property must be used. The respective providers calculate the amount of the real estate pension on the basis of various models that include other aspects such as haircuts or fees.
Example: A very simplified invoice
They are 75 years old and own an apartment with a market value of 200,000 euros. You assume that you will live in this apartment for 15 more years. 15 years equal 180 months. With a monthly rent of approximately 600 euros, the following bill would exist: 200,000 euros – (180 × 600 euros) = 92,000 euros .
These are the rental income that the bank escapes because they still live in the property. Since the bank has to live with a certain risk, whether the state or the value of the property remains, it usually raises a security surcharge. If this is 10 percent, the calculation continues as follows: 92,000 euros – 10 percent = 82,800 euros .
This amount will eventually be divided by the time that you will probably spend in the apartment: 82,800 euros ÷ 180 months = 460 euros .
This sum would be equivalent to a monthly annuity in this example. In practice, however, the calculation is much more complex. These numbers are therefore for illustration only and an approximate orientation.
When does a real estate pension pay?
A real estate pension pays off especially when the life expectancy on which the contract is based is exceeded. It is also worthwhile if the recipient of the monthly payments lives longer in his own home than predicted.
Potential risks for homeowners
Homeowners have the risk that the actual payout amount of the monthly pension is far lower than previously calculated when taking out a real estate pension. Since banks themselves are dependent on interest rates on the capital market, they can pay for this interest rate uncertainty in the form of higher costs or safety premiums.
Another risk exists with reverse mortgages, which are paid on the future sale proceeds of the property. If house prices fall significantly during this time, the mortgage itself can not be completely repaid by the sale and the borrowers are in debt.
Find suitable suppliers
In Germany, the number of providers of real estate pensions is manageable. They are usually banks and insurance companies. They take a certain risk with the issue of real estate pensions. If the borrower lives longer than estimated for the calculation of the real estate rent, the banks or insurance companies must expect losses. However, these losses can only be compensated with large capital reserves, just like banks and insurance companies.
Until 2016, the Raiffeisen banks and Volksbanks in particular were known as supraregional providers, but have meanwhile discontinued their offer.
Another risk for providers is that residents in Germany are getting older and older, and they have to continually adjust their calculation models without making the product unattractive, because only disproportionately small amounts can be paid out.
The hesitant offer of real estate pension providers in Germany is also due to the fact that the profits for the lenders can only be achieved in the long term. If a contract for a real estate pension is concluded, the bank or insurance company will in some cases only come into possession of the loaned property after two decades. These planning cycles are common in mortgage lending. However, the bank also assumes the risk that the property in question will lose value over the term.
Does the real estate pension have a future?
Although it is still a dream of the future, the further development of the real estate pension to a private investment is conceivable. For example, young families with little equity can finance a property in which a couple lives in retirement. The young family pays the pensioners an annuity and receives the right to own the property after their death. This idea is promoted by the rising real estate prices in Germany, due to which fewer and fewer families can afford a home.
The modification of the real estate pension would then be a worthwhile alternative in which both sides gained. Pensioners and homebuyers would not need a bank or insurance to settle the contract for this form of private investment.