Loans for the Elderly Using Home as Collateral? Not in Portugal

14 January 2018

BNI Bank is awaiting a law that would permit the sale of reverse mortgages to senior citizens in Portugal.

Saving during retirement is increasingly difficult. With cuts to retirees’ pensions and the sustainability of Social Security under threat, the elderly may have to find alternative solutions that will give them some comfort in their last years of life. The difficulties that the elderly face to obtain financing led to the appearance, over the course of the last forty years, of an alternative: reverse mortgages.

A reverse mortgage is the opposite of a conventional mortgage. Aimed at seniors, generally over 65 years of age, it allows homeowners (entirely, or almost wholly, free of fees) to obtain a loan, using their home as collateral – while still residing in it. It is a way to take advantage of the value of the property without having to resort to selling or renting it. Unlike traditional mortgages, which require a more rigorous analysis of people’s ability to repay, in reverse mortgages “the assessment is limited to the home,” says João Morais Barbosa, head of the Reorganiza school of personal finance. The loan can be granted in one go, through a line of credit or in instalments, but the contract only ends with the death of the owner or the sale of the home. It is only at that point that the debt to the financial institution (which increases over the years) will be paid off, leaving the owner or heirs with two options: pay back the debt and keep the home, or sell it to pay off the loan.

No such product in Portugal

While prevalent in countries such as the USA, Canada, Australia, Japan and even in Europe (UK, Spain and the Scandinavian countries, among others), reverse mortgages are non-existent in Portugal. “There were, at one time, similar products offered by insurers, but they were not successful,” says João Morais Barbosa. The economic and financial crisis, coupled with the “fear of a sharp fall in real estate prices, made this market difficult to sustain”, explains Luís Oliveira, a professor and researcher in the ISCTE’s Finance department, who provided guidance for a master’s thesis entitled “Reverse Mortgages in Portugal: a viable option?” The “culture of inheritance between generations” in the country may make it difficult for the Portuguese to take advantage of this type of product, according to João Fernandes, an economist at Deco Proteste, a consumer rights organisation.

Of the twenty institutions contacted by Expresso, only two – the insurance company Fidelidade and the bank BNI Europa – say they have already made this kind of product available. In addition to these, Ocidental Seguros says that it has “been analysing solutions that would allow [the company] to respond to customers who own real estate and who want to monetise this asset, obtaining additional income,” but does not plan to market reverse mortgage products in the short term.

The most recent example of a firm offering this type of product is that of BNI Europe. Operating in Portugal since 2014, the bank created a solution called Cereja in 2017 but was forced to suspend it following demands by the Bank of Portugal (BdP). “The sale of the product was suspended because the BdP requires the passage of the relevant legislation,” Pedro Pinto Coelho, CEO of BNI Europe, explained. “We are working towards this.”

Contacted by Expresso, BdP points out that, although they are marketed in several EU countries, the complexity of these products “poses specific risks to banking customers, which has led the competent authorities to define specific rules for their sale.” This was the case of Spanish Law 41/2007 of December 7 and the Mortgages and Home Finance: Conduct of Business Sourcebook published by the UK’s Financial Conduct Authority. The standards “regulate, among other things, aspects such as the provision of pre-contractual information to customers, the need to assess the suitability of products to the characteristics and needs of customers and the provision of advice.” International examples can “allow supervisory authorities” to “learn” to “perfect and create a model that can be applied to the Portuguese market,” Professor Luis Oliveira believes.

Risk or Opportunity?

The ageing of the Portuguese – with the National Statistical Institute estimating a total of 2.8 million elderly people in Portugal by 2080, which would be the second oldest population in the EU – cuts in pensions and the difficulties that the elderly face to obtain financing are elements conducive to the creation of a reverse mortgage market. There are other windows of opportunity, which include the fact that Portuguese peoples’ savings are “highly concentrated in housing” and Portugal is “one of the countries where many people own the house where they live,” João de Quintanilha added. The managing director of Groupama Seguros believes that the product, although “difficult to implement”, “is capable of creating a market in the country,” especially if launched by large institutions.

But these products also carry risks. Fluctuations in interest rates and the value of the property can lead a situation in which, by the end of the contract, the amount of the debt is higher than that of the property. That is why “the credit to be granted should only represent a proportionally small part of the property’s appraisal value” to avoid increased costs for the owners (if the contract ends with the sale of the house) or heirs (in case of death of the owner), Mr Oliveira stressed. If the owner/heir does not want to pay the debt, the property will be repossessed by the financial institution. “[The property] will most likely be transferred to a real estate investment fund that will try to reimburse the institution,” which manages to “eliminate the loan from its balance sheet,” he explained. The creation of “proper and appropriate” regulation, which would define which party should assume the risk in the case of a mismatch between assets and liabilities, the willingness of financial institutions to “accommodate those risks” and the role of the public sector – whether “in creating regulations” or as a “supplier of long-term instruments (debt issues) that enable institutions to hedge interest rate risk positions” – are critical to the success of this market.

Original Story: Expresso – Maria João Bourbon

Photo: Paulo Vaz Henriques

Translation: Richard Turner