Reverse mortgage: what it is, how it works and its tax advantages in Catalonia

This is a type of secured credit with a mortgage that, unlike a traditional mortgage, is not intended for the acquisition of a property, but to transform the equity value of the home into liquidity.

Its purpose is unequivocally welfare-oriented: to allow those over 65 years of age, or those in a situation of dependency, to supplement their income and improve their quality of life.

In a context of an ageing population and pensions that do not always guarantee economic sufficiency, the reverse mortgage is presented as an instrument of asset and social protection, designed to offer security and autonomy without giving up the home.

It is no coincidence that its regulation was established, in 2007, within a law that combined financial, mortgage, and welfare aspects, and that required the intervention of a notary for its formalisation, guaranteeing the transparency and understanding of the act.

The justification for the reverse mortgage cannot be understood without reference to the social context in which it arises. Spain is one of the European countries with the highest rate of home ownership among those over 65 years old, but also one of those with the highest risk of poverty in old age. Faced with this paradox — abundant real estate assets but scarce liquidity — the law offers a way to transform part of that accumulated value into periodic income, without breaking the emotional and vital bond with the home.

The protective nature of the institution is in line with articles 41 and 50 of the Spanish Constitution, which oblige public authorities to guarantee the economic sufficiency of citizens in old age. For this reason, the reverse mortgage was conceived not only as a financial instrument but also as a social policy mechanism.

The regulations require that, before contracting it, the client receives independent advice — regulated by Order EHA/2899/2011, of 28 October, on transparency and protection of banking service customers — as well as a clear and comprehensible binding offer, with information on the economic conditions and the succession effects of the contract.

The Bank of Spain, in its Guide to Accessing the Reverse Mortgage, emphasises that this figure is especially aimed at those who wish to maintain their standard of living and independence without resorting to selling the home. However, it warns that this is a complex product, which requires calm analysis and the professional assistance of a Notary who guarantees full understanding of the act and its suitability to the circumstances of the grantor.

The operation of the reverse mortgage can take two forms: that of a loan with a single disbursement, or that of a current account credit with periodic disbursements, the latter being the most common. In this second case, the credit institution undertakes to make a monthly amount available to the client for a determined period, until reaching the maximum percentage of the appraised value of the property. The interest is capitalised, and the total debt — capital plus interest — becomes payable upon the borrower's death.

The General Directorate of Legal Security and Public Faith has precisely defined its effects. The Resolution of 21 December 2007 confirmed that the reverse mortgage constitutes a perfectly registrable contract, even though its maturity depends on a future and uncertain event — the debtor's death.

Subsequently, the Resolutions of 1 October 2010 and 4 November 2010 clarified that, in this type of operation, the mortgage guarantees the final balance of the credit and not each partial maturity, so the five-year interest limit of article 114 of the Mortgage Law does not apply. Consequently, the interest may be added to the capital and, in turn, accrue new interest, in accordance with the special regime provided for in DA 1.º, sixth paragraph, of Law 41/2007.

The death of the holder initiates the liquidation process. The heirs may choose to pay the debt and keep the property, refinance it through a new loan, or allow its enforcement. If the value of the property exceeds the debt, the surplus belongs entirely to them; if, on the contrary, it is insufficient, the creditor may not claim more than the inherited assets. This limitation, which protects the successors against possible subsequent debts, constitutes an essential guarantee of the system.

Although the figure is regulated at the national level, its application in Catalunya must be interpreted in light of Catalan civil law, which is more attentive to the autonomy of will and the protection of the elderly or dependent persons. The Civil Code of Catalonia, in its Fifth Book (Real rights), does not expressly regulate the reverse mortgage, but it does incorporate principles that reinforce its operability and protective function.

Particular relevance is given to article 569-25 CCCat, which imposes the duty of annual accounting by the administrator of others' assets, a provision that can be extrapolated to cases where a financial institution manages the borrower's credit or monthly income.

In Catalan notarial practice, it is recommended to include clauses that guarantee transparency and continuous information, and that provide for the intervention of an additional beneficiary — for example, the spouse or cohabiting partner — so that the credit does not extinguish until the death of the last of them.

This attention to detail, typical of Catalan civil law, makes the reverse mortgage an adaptable figure, capable of being integrated into estate and succession planning strategies, especially in family contexts where there is a desire to protect the surviving spouse or keep the estate within the family nucleus.

One of the incentives that the legislator introduced to promote the reverse mortgage was precisely its favourable tax and tariff treatment. The Additional Provision 1.ª, section 7, of Law 41/2007 declares exempt from the gradual quota of Documented Legal Acts (AJD) the public deeds that document the constitution, subrogation, novation or cancellation of these mortgages.

This is an objective exemption, that is, applicable to the operation itself regardless of who is the taxpayer of the tax.

The Binding Consultation V3133-19, of 11 November 2019, from the Directorate General of Taxes, expressly confirmed the validity of said exemption following the reform of article 29 of the Consolidated Text of the ITPAJD Law by Royal Decree-law 17/2018, which attributed the lender the status of taxpayer.

This implies that the reverse mortgage continued to be exempt from AJD, even when the tax formally falls on the financial institution.

In the tariff field, the same legal provision substantially reduced notarial and registration costs: reverse mortgage deeds are considered documents without value, applying the minimum notarial tariff, and the registration entries benefit from a 90% reduction on the ordinary fees.

Consequently, the total formalisation cost is significantly lower than that of a conventional mortgage, which enhances its accessibility throughout the territory, also in Catalunya, where the ageing population presents a particularly favourable scenario for its development.

From a legal and economic point of view, the reverse mortgage presents obvious advantages: it allows obtaining periodic income without selling the home, maintains ownership and lifelong use of the property, limits the liability of the heirs, and enjoys favourable tax treatment. Its main virtue lies in transforming assets into liquidity, without losing the legal security offered by notarial and registry intervention.

However, its dissemination remains limited. Cultural factors — such as the desire to bequeath the home to the children — along with the technical complexity of the product, have hindered its implementation. Hence the Banco de España guides insist on the need for specialised advice and full understanding of the contract, and that the Notary must intensify their role as an impartial advisor, explaining to the grantor the civil, inheritance, and tax consequences of the transaction.