Analysis

Reverse Mortgage

Legal alert (14/2014)

The act on reverse mortgage providing homeowners with a new loan to release equity, will come into force on 15 December this year.

The act on reverse mortgage will come into force on 15 December this year. It introduces a new type of a loan to the Polish market whereby homeowners can release equity in the property. The arrangement is intended mainly for elderly persons but the act has not set a bottom age limit.

The reverse mortgage will only be offered by:

  • banks and branches of foreign banks;
  • branches of credit institutions and credit institutions that are operating across borders supervised by the Polish Financial Supervision Authority or supervisory authorities in their home state.

The borrower may be:

  • an individual who owns a property or who has a cooperative member’s ownership right to premises or the right of a perpetual usufruct;
  • an individual who co-owns a property or who has a share in a cooperative member’s ownership right to premises or in the right of a perpetual usufruct (e.g. a spouse).

Contrary to the annuity (offered by mortgage funds), the reverse mortgage will not involve a waiver of the right to the property by the borrower. This will only happen at the end of the tenor (death of the borrower).

The reverse mortgage will be a fixed term, not a lifetime, agreement. The loan will be paid out in one payment or in instalments throughout the period and in the amounts specified in the agreement, not longer than until the death of the borrower. The act provides for arrangements to protect the rights of the borrower’s heirs. If they wish to keep the property, they will have 12 months as of the death of the borrower to repay the bank. If they fail to do so, the bank will become the owner of the property, however, if its value exceeds the bank's receivables, it will have to pay the surplus (based on a property appraisal) to the heirs.

Over the term of the reverse mortgage agreement, the property must remain in the same good condition, the borrower must pay all taxes and compulsory fees related to the use of the property in a timely manner and (on the bank's request) provide insurance against fortuitous events.

The act also provides for a number of information requirements imposed on banks. Before the agreement is concluded, the borrower must receive a special form with a catalogue of material information. This includes the amount of reverse mortgage; how it is calculated and how it compares to the value of the property; how interest is determined; what the interest is and how it may change; the amount and method of payment of commission and other costs of the loan and how they are settled.

Borrowers are extra protected by the right to withdraw from an agreement within 30 days of its conclusion, without stating any reasons. In such an event they are not charged any costs related to the withdrawal, except for non-refundable fees paid by the bank to state administration and courts.

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