A lifetime of paying off the loan for your own home and in old age the money is not enough to live on despite rent-free living – that is the bitter reality for many people in Germany. Especially when they have to do major repairs on the house in their old age, when the housing allowance for the apartment swallows up too much of the pension or when there is not enough money for the nursing service.
For many, the question arises in the course of their pension gap as to how they can top up their pension fund. Selling and moving out is not an option for many retirees – very few want to leave their familiar surroundings, especially in old age. The good news: It is quite possible to turn your own home into money and still live in it with the help of a real estate annuity.
There are a number of different financing models that owners can choose from. Depending on the model, the pensioner receives either a one-off payment or a lifelong pension. With some contracts he remains the owner even after the sale until his death, with others he only has a right of residence.
Real estate pension – a big step
The less good news: There is no general answer as to whether real estate retirement is worthwhile. That depends not only on the chosen model, but also on the individual life situation. Factors are, for example, whether you have heirs and how big your own pension gap is. In addition, depending on the model, retiring your home is a bet on your own life expectancy – whether it was financially worthwhile for the retiree or the buyer in the end can hardly be predicted in advance and, depending on the contract, also depends on how old the seller is. “The decision to buy a real estate pension is a big step and needs to be carefully considered. During the consultation, we repeatedly see people who end up choosing a different model than they had originally planned,” says Georg Doll, managing partner of the real estate pension consultant WIR WohnImmobilienRente. “That’s why it’s important to compare different products and providers before making a commitment.”
One possible form of real estate annuity is the usufruct. The pensioner can sell the property or, for example, give it away to their own children while they are still alive, but they can continue to live in it. The period varies depending on the usufruct model, can be limited or apply for life. The difference to the classic lifelong right of residence: The usufructuary may also use the property economically, i.e. earn rental income and thus pay for their own care costs, for example. Another advantage of usufruct: it lowers the market price of the property. Heirs benefit from this in that they can make full use of the allowances for gift and inheritance tax and save a lot on taxes.
Annuity or Reverse Mortgage?
An alternative to usufruct is the annuity. In return for the sale of his property, the pensioner does not receive a one-off payment, but a monthly pension for the rest of his life. Another crucial difference to the usufruct: the retiree is no longer the owner of the property after the sale, so from then on the buyer is responsible for the maintenance. Nevertheless, retirees also have a lifelong right of residence here, which they should register in the land register.
Another way to annul your property is the reverse mortgage. Here it depends on the contract whether the pensioner receives a one-time payment, a lifelong or a temporary pension. The principle is much more widespread in the USA and Great Britain than in Germany and works like this: the pensioner lends his home to a bank and in return receives, for example, a small monthly pension. The loan granted by the bank does not correspond to the actual market value of the property, but is usually significantly lower. The pensioner can continue to live in his own four walls and does not have to pay any interest, taxes or monthly installments for the loan. He is also free to sell the property during his lifetime and use the proceeds to pay off the loan. If, on the other hand, the property goes to the heirs after his death, they must decide whether they want to sell the property and thus pay off the loan or whether they want to keep the house. Pensioners must clarify who pays for the maintenance costs on a case-by-case basis.
Even if the loan for retirees can be a good supplement to their pension, they should carefully consider whether it is worth it in each individual case, especially if there are heirs involved, because the mortgage reduces the inheritance. “The reverse mortgage is a relatively expensive product. This affects both the interest rate for the loan and the fees incurred,” explains the North Rhine-Westphalia consumer advice center. “For example, the transaction fee and the bank’s reinsurance against the risk of a long life – that is, if the owner lives longer than statistically calculated.”
Which form of retirement is the right one depends on the individual case and also on the respective provider – the market is still relatively new in Germany, explains the consumer advice center. “Reverse mortgages and annuities have not yet caught on in Germany, so we have to wait and see how things will develop further.”
Do you already know ours? Newsletter “The Week”? Every Friday in your mailbox – if you want. Here you can sign up