More than 52% of retirees with a contributory pension receive less than 1,200 euros per month, which marks the minimum pension in Spain. However, 92% of retirees have their home fully paid for. In short, they have assets, but little money available month to month. There is a way to increase the money in your account and thus be able to enjoy that income every day.
Fortunately, the house can be a source of income to supplement the public pension. Thus, a retiree could take advantage of her home to convert that illiquid wealth into hard cash, that is, into liquidity.
There are several formulas to monetize home ownership and in some it will not even be necessary to leave the house.
Rent the home to move out of rental
“In Spain it is very common to retire in the house where you have lived all your life with your family. And that is very good, but normally they are houses much larger than what you need when you retire,” explains Luis Pita, CEO of Preahorro.
“We are talking about houses with three or four bedrooms, larger than what a retiree needs and with much more costs,” he indicates. His solution is to rent the home and rent a house better adapted to the needs of the retiree.
With this movement you can generate extra income from the difference between the rent of the house you own and the new one as a tenant. “In addition, since they are smaller houses, you also save on supplies and you have to spend less time on maintenance,” adds Pita.
Within the lease, there is also the option of renting the house when you are not using it if it is a second residence or renting rooms if it is a very large house. With this last option you can earn money and avoid loneliness during retirement.
Make a reverse mortgage
The reverse mortgage is not new, but its offer has increased in 2023 with the entry of large entities such as Banco Santander or Mapfre in the sector.
The reverse mortgage is a solution to get money for the house without selling it. It consists of signing a loan with a mortgage guarantee on the home, with which the financial institution will give you money, either in cash or in the form of rent.
The reverse mortgage has some differences from a regular mortgage:
It does not generate the payment of monthly installments. It is a loan that does not have to be repaid immediately. The loan plus interest is paid at the end. That end is usually upon the death of the owner of the home. At that time, the heirs will be able to choose between returning the money plus interest, which is around 6%, and keeping the house or selling it, paying the debt and keeping what is left over.
The advantage of this formula is that the retiree can continue using the home and even rent it, since for practical purposes the house is theirs. There is no transfer of ownership.
The risks and drawbacks of this formula include the high interest rate, which will also generate a snowball effect, and the costs of formalizing the loan.
Sale of bare property
This is another formula to make the home liquid and complement the pension. It consists of selling the bare property and reserving the usufruct of the house. That is, the ownership of the home is transferred, but the right to use it is maintained.
This can be done because bare ownership is only one part of the full ownership of the home, the other is the right of usufruct. Thus, the retired person transfers ownership of the home and maintains the right to use it for life, while obtaining money from that sale.
With the sale of the bare property you can obtain between 70% and 50% of the value of the house depending on the age at which it is obtained. The older you are, the greater the amount of money.
This formula has two disadvantages. The first is that the ownership of the home is lost, although with the usufruct the house could even be rented. The second is that the sale of the bare property implies the payment of income taxes on the profit generated, unless it is the habitual residence.
Sale with rent or reverse housing
In this case, full ownership of the house is sold and a life rental contract is signed at the same time. Thus, the retiree obtains liquidity for the home to complement the pension without having to leave the house.
This rental can be signed with a rent paid monthly or, as is more common, as a discount on the final price. In this way, the retiree ensures a fixed and normally affordable price, while the buyer obtains a reduction on the price of the home.
Real estate annuity
With this option the house is sold and a life annuity is contracted. This annuity will prevent you from having to pay taxes on the sale of the house, although you would not have to pay taxes if it is your primary residence.
The real estate annuity can be made on the full ownership of the home or on the bare ownership. In addition, it would also be possible to establish a life rental contract on the home, although the amount received would be less.
Rental advance
It means delegating the rental of the home to another person or entity, who will pay the retiree the agreed money as an advance, whether the house is rented or not. It is like transferring the risk of rent to another person in exchange for reducing the amount received each month.
As Preahorro explains, this formula works very well during retirement to, for example, pay for a residence.
Finally, there is always the option of selling the house to buy a cheaper one and having that extra money complete the public pension. In this case it is important to plan the operation, do it when you are over 65 years old and on your primary residence, which is one of the 4 cases in which you will not pay personal income tax when selling your house.
