Residential property is the best asset to supplement a pension: reverse mortgage, naked ownership or life tenancy

Housing is the primary wealth of many Spaniards. The main investment of Spaniards is real estate, in which they accumulate most of their wealth, which is confirmed by the data that 77% live in their own property. This attachment to 'bricks and mortar' makes housing one of the best assets for a supplementary state pension for an old age that is becoming increasingly long due to rising life expectancy - up to 80 for men and just over 85 for women.

Life expectancy in retirement

According to the National Institute of Statistics, life expectancy after retirement is 19 years for men and almost 23 years for women, which presents us with many challenges," says Belen Alarcon, partner and director of asset management at Abante. Among them, she notes, is the need to properly plan investments and savings for retirement to provide for yourself in your old age.

Use housing to generate additional income in retirement.

In this situation of increasing life expectancy, housing is the main wealth of many Spaniards and "although most do not think of selling it, they can get the necessary financing from it" to avoid losing purchasing power in retirement, says Alarcon.

To meet these needs, there are products on the market that use housing as a source of income. Among them, Juan Angel Lafuente, professor of finance and accounting at Jaume I University, and Pedro Serrano, associate professor of financial economics and accounting at Carlos III University in Madrid, highlight three in their book How to Supplement Your Retirement by Owning Your Own Home: reverse mortgages, naked title sales, and lifetime rentals.

Reverse mortgage

This is a loan secured by real estate. The person taking it receives a sum, in the form of capital or life annuity, less than can be obtained by selling the property at market value. He retains ownership of the home and may continue to reside there. After his death, his heirs can pay off the loan or sell the house.

For a loan to be considered a reverse mortgage, certain conditions must be met, such as the age of the applicant and recipients, exceeding a disability threshold, or having some degree of dependency. In addition, the borrower must receive the loan amount in a single payment or through periodic installments.

The sale of a bare title to a property

This is a transaction in which the rights to real estate are transferred to the buyer, but the buyer cannot own it because the use and enjoyment (usufruct) remains with the seller until his death or as specified in the contract.

According to Lafuente and Serrano, with this formula, the owner can receive between 30% and 75% of the market value of the home, depending on its age.

Lifetime rental

This scheme does not retain ownership of the home. First, the value of the property is assessed, then, based on the owner's life expectancy, the cost of renting the home for the specified years is calculated. The cost of rent is added to the value of the property, along with a premium applied by the organization and the amount left with the owner from which a lifetime income can be created.

If at some point a retiree decides to move into a nursing home or to a relative's home, he or she will recoup unused rent, and if he or she lives longer than expected, he or she will save excess income.

This option can provide liquidity of 50% to 80% of the market value of the home, depending on the age of the recipient.

This option is based on an exchange of rental payments. An example is when a person wants to move into a nursing home but cannot afford to do so. In this case, through a rent swap, the investor pays the pensioner the extra money needed to pay for elderly care, e.g. €1,200, in exchange for the rent received from renting out his home, e.g. for €1,000. The difference between the amount needed by the elderly person and the amount received from the rent - in this case 200 euros - is financed by the investor proposing such an exchange.

After the owner dies, the heirs must close the accumulated debt by repaying the borrowed capital plus interest. These payments can be made in several ways: cash in the amount of the debt or allowing the investor to continue renting until the debt is paid in full.

The choice of one of these options depends on the retiree's family situation, so according to Lafuente and Serrano, the presence of children and their attitudes can be critical in deciding whether to keep the property or transfer it. Both experts believe that if there are descendants, a reverse mortgage would be an appropriate product, and if there are none or the relationship is poor, naked title may be a better solution.