A reverse mortgage is a novel financial product in Colombia's legal and financial system, which, according to the draft decree published by the Ministry of Housing, City and Territory, may be offered soon by different entities. This product establishes a bilateral contract that can be carried out between an entity that offers and acts as a mortgage creditor, and one or more borrowers, who must be over 65 years of age and own a property jointly.
The product consists of a natural person receiving money in exchange for creating a mortgage guarantee on the property, in favor of the entity that offers the product. Considering the above and the decree that regulates this product, there are three different modalities in which the same product can be offered: (i) a single provision, in which a single amount of money is given to the borrower, in a one-time opportunity. (ii) temporary periodic provisions, in which delivery of money is fixed for a specified period, and (iii) periodic lifetime provisions, which consists of the borrower receiving periodic amounts of money until the day of death. It is necessary to clarify that, within the modalities in which multiple payments of money are conceived, it can be agreed that those payments can be constant or staggered, depending on the needs and will of the borrower.
The reverse mortgage is a financial product in which the money that is given to an individual, will be paid in the future with the interest that would have been caused during the time of the contract, meaning, the property is used as a payment guarantee mechanism. Six months after the death of the borrowers, the entity may demand payment of the money given to the individual plus the interest caused. The heirs of the borrowers will be required to make the payment, but they will have the possibility to give the property to the creditor as lieu of payment for the fulfillment of the obligation.
However, to determine the amounts of disbursements in favor of the borrowers, the value of the property must be considered and determined by a certified appraiser. The appraisals must be carried out every five years to keep the property’s value up to date. Periodic appraisals allow the parties to update the previously agreed conditions so that the disbursement amounts can be modified, reflecting urban and real estate factors that may affect the price of the property. Likewise, the regulation proposed by the Ministry of Housing will allow borrowers to request at any time, a renegotiation of the mortgage operation, including modalities of the product, disbursement amounts, among other elements of the contract.
Considering that the population that will be able to access this product is of special constitutional protection, the proposed decree imposes a burden of pedagogy and counseling necessary for the acquisition of the reverse mortgage. In this sense, the draft decree forces the mortgages creditors that offer the product, to provide certain, sufficient, and opportune information to the borrowers so they can make informed decisions. Based on the same fact of vulnerability, the monitoring and control by the Financial Superintendence of Colombia to the entities offering this product must be strict to safeguard the rights of that population.
The offer of this product invites to discuss a possible paradigm shift in terms of the use of the assets of the elderly. Possible borrowers might have a new option to have a better flow of money without having to sell their property, lease it, sublet it or even, take a traditional mortgage among other options that currently exist on the market. The reverse mortgage allows the potential borrowers to inhabit the property until the time of his death without the risk of losing it before that time. Additionally, it invites family discussion concerning the destination of the borrower's assets: Should the financial freedom of a borrower be sacrificed for the protection of eventual inheritance rights?
It is important to reiterate that the reverse mortgage is a financial product and in no way replaces the obligation of the State and the pension funds to the elderly. In Colombia, the right to an old-age pension is a constitutional obligation and allows senior populations to enjoy paid and dignified retirement after years of work. In this sense, this product seeks to provide greater flexibility in the use of assets to the elderly, establishing itself as a complement to the old-age pension but in no sense as a replacement for it.