Enjoying retirement without worries? For more and more seniors, this wish is not fulfilled. However, there is a way for homeowners to increase their monthly income: the so-called real estate annuity. This allows the assets tied up in one's own four walls to be used without the owner having to move out. How this works and whether it makes sense, explain ARAG experts.
How does the real estate annuity work??
The homeowner sells the apartment or house and in return receives from the buyer a monthly annuity for life, i.e. a payout. And he may live in the property until his death. Both the annuity and the right of residence are entered in the land register. The new owner takes care of the maintenance. The older the former owner gets, the more expensive the property becomes for the buyer.
How does a reverse mortgage work?
It is a special form of the life annuity. Here, the owner concludes a loan agreement with a bank or insurance company. The house remains the property of the owner, the mortgage is paid out in monthly installments. At the end of the term, the property becomes the property of the lender, or the previous owner – or, if applicable, his heirs – repays the granted loan. Unlike real estate annuities, the monthly installment payments do not end only upon the death of the real estate owner.
What speaks for the life annuity?
For retirees who own a property that is largely debt-free and want to remain living in that property, the annuity is a great way to significantly increase monthly income. It is to be considered naturally that the real estate for possible heirs is then 'no longer available. Of course, there is also a downside: If the former owner dies unexpectedly early, the property is sold to the new owner for less than its value. To minimize this risk, an individual minimum term of a few years can be specified, according to ARAG experts. In the event of death, the heirs then receive the pension over this period.
What speaks for the reverse mortgage?
Seniors get planning security, as all important factors – for example the amount of the pension, interest rate, term – are fixed in advance. An unpleasant course of the real estate annuity would be, however, if the annuity helps out of a financial bottleneck, but the pensioner can no longer live in his property for health reasons a short time later. If, however, the house or condominium is mortgaged in the form of a reverse mortgage, it can also be sold in the event of long-term care. The proceeds of the sale are then used to repay the loan. If anything remains, it can be used for further care or bequeathed.
What is important to pay attention to?
Seniors with a house or condominium should first and foremost ask themselves how important it is to them to remain living in their own property. Both the real estate annuity and a reverse mortgage are relatively expensive products. The interest rate for the loan granted is high; fees incurred, such as the closing fee and the bank's reinsurance against the longevity risk – i.e. if the owner lives longer than statistically calculated – are substantial.
According to ARAG experts, prospective buyers should also pay particular attention to how the value of the property is determined. Finally, the amount of the additional annuity is based on these factors. Interested should consider therefore well, which pension model they select. According to ARAG experts, it is also important to clarify how exactly the right of residence and usufruct is regulated and who must pay for maintenance and renovation costs.
ARAG is the largest family-owned company in the German insurance industry and sees itself as a versatile quality insurer. In addition to its focus on legal insurance, ARAG also offers its customers in Germany attractive, needs-oriented products and services from a single source in the areas of property/casualty, health and retirement planning. Active in a total of 17 countries – including the USA and Canada – ARAG also occupies a leading position with its legal insurance and legal services in many international markets through its international branches, subsidiaries and equity interests. With over 3.900 employees, the Group generates a sales and premium volume of around EUR 1.6 billion.