«I am 74, the house is paid off and my pension does not stretch far enough. If I sign a reverse mortgage, will my children lose the house?» Not necessarily. A reverse mortgage is a loan secured on your main residence that only becomes payable when you die, and the First Additional Provision of Law 41/2007 gives your heirs the right to keep the house by paying what is owed, to sell it to settle the debt, or not to pay at all, in which case the lender can only recover up to the value of the assets in the estate. Whether your children keep the home depends on whether they have the cash or want to sell, and on how the contract was drafted. I explain it with the law in front of me, which is what the pages published by the entities selling the product do not do.
What a reverse mortgage is under Law 41/2007
The figure does not appear in the Civil Code as a contract with its own name. It is governed by the First Additional Provision of Law 41/2007, in the wording in force since April 2015. Section 1 defines it as a loan or credit facility secured by a mortgage on the applicant’s main residence, subject to four conditions.
The first concerns the person. The applicant, and any beneficiaries the applicant designates, must be aged 65 or over, or in a situation of dependency, or have a recognised degree of disability of at least 33 per cent. The second is the manner of payment. The money is received through periodic drawdowns or in a single drawdown, as agreed. The third is the one that matters to you and your children. The debt only becomes enforceable by the lender, and the mortgage only enforceable, when the borrower dies or, if the contract so provides, when the last of the beneficiaries dies. And the fourth requires that the property be valued and insured against damage.
Section 2 restricts who may grant this product. Only credit institutions, financial credit establishments and insurance companies authorised to operate in Spain. If an intermediary, an estate agency or a private individual offers it to you, what they are proposing is something else, and the safeguards I describe here do not cover you.
How it works while you are alive
You remain the owner. The house does not change hands, you neither sell it nor give up its use. What you do is mortgage it as security for a loan which the entity pays out to you in monthly instalments, or in one go, over the agreed term. Unlike an ordinary mortgage, you repay nothing during your lifetime. Interest is added to the capital drawn down, and the debt grows every month.
Periodic drawdowns have a term, and commercial offers rarely highlight it. When that term ends, you stop receiving money, but the debt does not stop, because interest keeps accruing on everything drawn down until death. If you live longer than the agreed term, you are left with no income from the product and a debt that keeps rising. To cover that risk, many entities offer an associated life annuity insurance, paid for with a premium deducted from the loan itself, which keeps paying you an income for as long as you live. That premium inflates the debt from day one, so the question to ask is how much capital goes into the insurance and how much actually reaches your account.
The sums you receive are loan capital, not income, and that is the general position as regards taxation. It is one of the product’s advantages over formulas that do generate income. If the insured life annuity is added, the tax treatment of what you receive from the insurance is different, and you should have it reviewed before signing, not afterwards.
The spouse or partner who does not sign
If the home belongs to both of you, both sign as borrowers. The problem arises when the house is the separate property of one spouse only, or when the couple is not married. Section 1 allows the applicant to designate beneficiaries, and the contract may stipulate that the debt only becomes payable when the last of them dies. If that clause is missing, the debt falls due on the borrower’s death and the person still living in the house depends on the heirs paying. If they do not, the property is sold or enforced against, with that person inside it.
The law permits the clause but does not impose it, so everything depends on the contract. Before signing, the beneficiary designation must be drafted so that the spouse or partner is covered, and that person must also meet the age or condition required by section 1.
What happens when the borrower dies and what rights the heirs have
When the borrower dies, or the last beneficiary if so agreed, the debt falls due. Section 5 of the First Additional Provision gives the heirs the right to cancel the loan, within the period fixed in the contract, by paying the full amount owed together with interest, and expressly prohibits the lender from charging any compensation for that cancellation. Note that the law says «within the stipulated period». That period is set by the contract and is usually short. It is the time your children have to decide and to raise the money, and once it runs out, the entity can enforce.
In practice the heirs have three options. They can pay the debt, with their own money or with a new loan, and keep the house. They can also sell it, settle the debt from the price and share out whatever is left. And they can simply not pay. That last option carries a statutory safeguard which is the most important piece of the whole regime.
Section 6 provides that if the heirs decide not to repay the debt, the lender may only recover up to the value of the assets in the estate. The entity cannot pursue the children’s personal assets. But note the wording. The law speaks of the assets in the estate, not only the mortgaged home. If the borrower also leaves a bank account, commercial premises or a plot of land, those assets also answer for whatever the house does not cover.
That is why the way the inheritance is accepted matters so much. Article 1003 of the Civil Code establishes that whoever accepts an inheritance purely and simply is liable for all the charges on the estate, with the estate’s assets and also with their own. The limitation in section 6 protects against the reverse mortgage lender, but the estate may carry other debts, and the separation between the deceased’s assets and the heir’s is only properly ordered and documented if the inheritance is accepted with benefit of inventory. In an estate with a reverse mortgage, accepting without more and paying out of your own pocket for things that were not yours to pay is the most common mistake we see.
We review the contract before signing and, once the borrower has died, we handle the heirs’ position against the entity, from the acceptance of the inheritance through to the decision to pay, sell or not pay.
If the debt exceeds the value of the house
It happens when the borrower lives many years, when the property loses value or when a life annuity with a high premium was taken out. The regime in section 6 is designed precisely for this. The heirs are not obliged to put in their own money to cover the shortfall. If they do not pay, the entity recovers from the house and from whatever else is in the estate, and if that is still not enough, the excess is the lender’s loss.
What is lost in that scenario is the house. That is why a reverse mortgage is not a neutral product for someone firmly intent on keeping the home in the family. If that is the aim, the question to settle before signing is whether the heirs will have, twenty years from now, the cash to cancel the debt within the contractual period.
Selling the house, moving into a care home or cancelling early
Section 5 contains a rule that surprises many borrowers. If the borrower voluntarily transfers the mortgaged property, the lender may declare the loan due early, unless sufficient replacement security is provided. Selling the house during your lifetime means, in practice, having to repay everything drawn down with interest at that moment, unless you offer other security the entity accepts.
Moving into a care home is different. The law requires the property to be the applicant’s main residence when the mortgage is set up, but says nothing about what happens if years later you stop living there without selling. There the contract rules. Some include clauses on the use of the property, on letting it or on notifying a change of residence, and they should be read with that scenario in mind, because it is a likely one for a person aged 80.
Cancelling during your lifetime, by repaying what has been drawn down, is possible on the terms of the contract. The prohibition on cancellation compensation in section 5 is provided for the heirs after death, so the cost of early cancellation by the borrower is a contractual term to check before signing.
Costs, taxes and the advice you are owed
The law makes setting up the mortgage cheaper. Section 7 exempts the deeds of creation, subrogation, novation and cancellation of a reverse mortgage from the graduated rate of stamp duty on documented legal acts. Sections 8 and 9 reduce the notary’s and land registrar’s fees. These are real advantages, and they only apply if the product meets the requirements of the Additional Provision. Section 10 says so plainly. A reverse mortgage may be set up on a property other than the main residence, but none of the foregoing applies to it, neither the exemptions nor the limitation of the heirs’ liability. A reverse mortgage on a second home is, legally, a different product with less protection.
Section 4 obliges entities to provide independent advisory services to the applicant, taking into account the applicant’s financial situation and the economic risks of the transaction. That advice is a legal obligation on the entity. The explanation given by the person selling you the product at the branch is not independent advice, and neither is a brochure. If you sign without having received it, the entity has breached a legal obligation, and that breach has consequences that can be enforced.
Alternatives and what it is compared with
The reverse mortgage competes with other formulas offered to the same public, and the essential difference lies in who ends up owning the property.
| Formula | Who owns the property | What the heirs are left with | When it is settled |
|---|---|---|---|
| Reverse mortgage | The borrower, until death | The house if they pay the debt, or the surplus if it is sold | On the death of the borrower or the last beneficiary |
| Sale of bare ownership | The buyer, with a life usufruct for the seller | Nothing of the house | At the sale, no debt remains |
| Rent advance | The owner, who hands over the property to be let and lives elsewhere | The house when the contract ends | When the agreed assignment term expires |
| Reverse mortgage with associated life annuity | The borrower | As with the reverse mortgage, with the debt increased by the insurance premium | On death, the annuity stops and the debt falls due |
Selling the bare ownership yields more money up front, because there is no interest, but the house is no longer yours and your children do not inherit it. The rent advance only works if you are no longer going to live in the property. The reverse mortgage is the only one in the table that lets you remain the owner, keep living in your home and leave the heirs the decision whether to keep it.
There is one more alternative that involves no financial entity at all. In Galicia, the apartación and the pacto de mejora allow the home to be transferred during the parent’s lifetime to a child in exchange for that child waiving their forced share or taking on obligations, and there are families where an agreement of that kind, with the child who keeps the house providing the financial support the parent needs, solves the problem without interest or insurance premiums. It requires trust and a properly drafted document, but it exists.
When not to sign
I advise against a reverse mortgage in several specific situations. A low-value home is the first. Valuation, insurance, notary and registry costs are fixed, and in a modest house they weigh so heavily that what reaches your account each month is little for the debt it generates. Nor is it a good idea with a short drawdown term and a long life expectancy, unless the associated life annuity is taken out knowing what it costs. A property that is not your main residence falls under section 10 and loses the law’s protection, so there the product is simply a different one. If there is a spouse or partner who cannot be named as beneficiary, or the contract lacks the last-beneficiary clause, the survivor is left exposed.
The most frequent case we see is that of children who want the house and will not have the money to cancel the debt. There the conversation with them comes before the signature. Sometimes the solution is for them to contribute now what the entity would contribute with interest, and for the home to be transferred during the parent’s lifetime. If the conflict is with one particular heir who should receive nothing, that is resolved by another route, as I explain in can you be disinherited, and not by signing a financial product so that the house is used up.
What you can do today on your own
Ask for the offer in writing and do not sign on the same visit. Check that the grantor is a credit institution, a financial credit establishment or an authorised insurer. Insist on the independent advice required by section 4 and keep a record of having received it, or of not having received it. Read the period your heirs will have to cancel and the beneficiary clause. Talk to your children before signing. And if the borrower has already died and you are an heir, do not accept the inheritance purely and simply, and do not pay the entity anything on your own account until you know what is in the estate and which option suits you.
Before signing, or before inheriting
Whoever signs on their own risks running out of income too soon, leaving their partner unprotected and leaving their children a matter of weeks to raise money they do not have. Whoever inherits and accepts without inventory risks mixing their own assets with the deceased’s in the eyes of every other creditor of the estate. We review the contract before signing, draft the beneficiary clause and, after death, handle the estate against the entity so that the heirs choose between paying, selling or not paying with full information. Call +34 677 841 007 or write through the contact page. Bring the offer or the contract, the valuation, the latest statement of the debt if the loan is already running and, in the event of death, the death certificate and the will or the declaration of heirs if you already have it.
Frequently asked questions
Are my children obliged to pay the reverse mortgage when I die?
No. Section 6 of the First Additional Provision of Law 41/2007 allows the heirs not to repay the debt, in which case the lender only recovers up to the value of the assets in the estate. What they lose is the house and the other inherited assets up to the amount of the debt, but not their own property. If they want to keep the house, they must pay what is owed with interest within the period fixed in the contract, with no cancellation compensation.
What happens if the debt is greater than the value of the house?
The entity recovers from the house and from the other assets in the estate. If that is still not enough, the shortfall is the lender’s loss, provided the mortgage is on the main residence and meets the requirements of the law. It is advisable to accept the inheritance with benefit of inventory so that the separation of assets is documented against any other creditor.
Can I sell the house or move into a care home with a reverse mortgage?
If you sell the property, the entity can declare the loan due early and demand everything drawn down with interest, unless you offer other sufficient security. Moving into a care home without selling is not regulated by the law and depends on what the contract says about the use of the property, so that clause has to be read before signing.
Do I need a lawyer to sign a reverse mortgage?
If the home is of low value, you have no partner or heirs you want to leave the house to and you only need a top-up for a few years, the transaction is straightforward and reviewing the contract is a short job. If there is a spouse or partner who is not a borrower, children who want to keep the home, other assets in the estate or an associated life annuity, the drafting of the contract decides who keeps the house and how much it costs, and there a lawyer who is not paid by the entity pays for himself.