Given the low levels of pensions that still prevail among those who are of the age to access said benefit, alternative sources of liquidity are necessary that allow those who retire from work to strengthen their income during this stage of their lives.
The Center for Economic and Budgetary Research (CIEP) carried out a recent analysis of the scheme called “Reverse Mortgage”, which until a few years ago was little known in Mexico, for which there was no regulation in the entire country and which was considered difficult to implement, but times have changed.
In this context, the first and most important thing is to know and/or know what a reverse mortgage is.
What is a reverse mortgage?
To put it in the most concrete way possible: the reverse mortgage is nothing more than the future sale of a property, with the benefit that the seller enjoys the resources in the present.
This mechanism is generally applied to the elderly, who have some property and are not going to inherit it, so they decide to sell it, but given the uncertainty of not having a place to live and no longer wanting to acquire another property or be paying rent for few or many years that they have left to live, resort to the reverse mortgage.
Thus, the owner sells, generally to a banking or mortgage institution, his property, but possession will not be taken until his death. In exchange, the owner will receive monthly payments or annuities at present value for the cost of the home, less all related expenses.
This mechanism strengthens the liquidity of pensioners, who add to their accounts income that they can dispose of.
Upon your death, the institution becomes the owner of the property, with all legal rights. In the event of the premature death of the owner(s), the bank grants its beneficiaries the corresponding compensation.
The reverse mortgage is a financial mechanism widely used in much of Europe and the United States.
Liquidity potential: CIEP
The CIEP analysis tries to elucidate the liquidity potential that a reverse mortgage scheme would have for the Mexican public.
According to the CIEP and according to data from the 2020 Population and Housing Census, there were 10.3 million adults over 65 years of age in Mexico, equivalent to 8.2 percent of the population, of which 54 percent are women and 46 percent are men.
The CIEP points out the relevance of identifying the sex of the elderly since, traditionally, women have fewer pensions, due to the fact that at working age they dedicated themselves to care or household tasks, which were not paid.
Likewise, highlights the fact that the configuration of the pension system, as well as the characteristics of the Mexican labor market, mean that a high percentage of adults over 65 years of age must continue working to be able to meet their expenses in old age. In this sense, the percentage of men who continued working and who received an economic remuneration in exchange was not less than 45 percent.
The CIEP, however, defines the reverse mortgage as follows:
The reverse mortgage is a capitalized interest loan, that is, a financial institution grants a loan to a person (in this case the elderly), and pays the amount granted in a single exhibition or in installments. The amount increases with age, in addition, they are usually granted with a fixed interest rate and the credit is paid once the beneficiary dies. The essential condition to be able to access this type of instrument is that the person owns real estate in order to convert their real estate capital into liquidity.
According to a CIEP exercise, based on real data, this is the potential of the reverse mortgage if it were to be implemented in our country:
The value of the house depends, of course, on the size of the property, the location, the construction, among other factors. The average value of housing is considered, both for Mexico City and for the State of Mexico, estimated by the Federal Mortgage Society (SHF) in the Housing Price Index in Mexico.
1) The monthly amount for a CDMX reverse mortgage amounts to 26 thousand pesos per monthwhile in the State of Mexico it is 8 thousand 549 pesos, due to the higher value of housing in CDMX and lower interest rates.
2) The reverse mortgage amount in CDMX is 52% higher than the average contributory pension and 10 times higher than the non-contributory pension.
3) The reverse mortgage amount in the State of Mexico is approximately half of the contributory pension and 3.5 times the non-contributory pension.
4) The older the contractor, the greater the amount that older adults receive monthly.
5) Women receive lower monthly payments because they live longer on average.
6) These figures could be added to contributory and non-contributory pensions so that older adults have a better livelihood for old age.
Legislation in some entities, but absent banks
The CIEP points out in its analysis that the first federal entity that included the reverse mortgage in its legislation was the State of Mexico in 2013, while five years later Mexico City integrated the figure of the reverse mortgage into its Civil Code.
However, To date, no financial institution offers a reverse mortgage within its catalog of services. The main reason is that there are no federal regulations, so it could not be put into practice in the states where the legal figure exists.
The CIEP has detected that another of the possible reasons why the reverse mortgage is not a valid instrument in the Mexican financial market, is the proportion of older adults who own their homes (still low), as well as the demand for this type of productSince older adults in Mexico generally transfer their assets and income to their children and grandchildren, they rarely sell them before they die.
The CIEP considers that the reverse mortgage could become the fifth pillar of the pension system in Mexico. This is important because the current pension system faces risks of unsustainability, since by 2023 1.7 trillion pesos will be spent on pensions, equivalent to 20.4 percent of total net spending, and 90 percent of this spending is made with current spending. , that is, it does not have a direct source of financing.
In addition, the CIEP considers that the distribution of this amount is unequal, with approximately 80 percent of pensioners with insufficient resources to cover health and care services. The demographic transition is on alert due to the precariousness of pensions and intergenerational inequality.
The reverse mortgage is a capital deaccumulation mechanism that would allow seniors to gain liquidity in their old agewithout putting your home and way of life at risk.
In summary, the reverse mortgage could become a solution for our pension system, providing additional liquidity to many of the country’s pensioners, it is urgent to advance in federal legislation.
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