Obtaining a mortgage in the latter years of your career can be hard, particularly after a divorce. But it is possible.
If you’ve ever searched for a home loan, you may have noticed that lenders tend to assume a 30-year loan term when advertising what the estimated monthly repayments might be.
However for many Aussies, the default 30-year home loan is unrealistic because it generally assumes you have 30 years of full-time work left to pay off your loan and own your home outright before retirement.
For someone like 56-year-old Amanda Gillard, navigating home ownership post-divorce as a mature-age borrower has led to many nights of research into how to pay off a mortgage before retirement.
After her divorce, Ms Gillard was left without up-to-date qualifications, an unfinished degree that had run out of time and no start-up money for a business (Picture supplied)
Speaking to Savings.com.au, Ms Gillard said there is limited information on smaller home loans with shorter repayment times for properties like studios and small apartments.
“It was hard to find information on smaller loans such as a $120,000 loan - one online calculator didn’t even accept prices under $250,000,” she said.
“The second shock was when a real estate agent showing me through a property suggested that a bank would be unlikely to lend on a property under 50 square meters.
“It seems there is a bit of a vacuum in advice that doesn’t net high sales commissions for mortgage brokers.”
Ms Gillard said she was feeling fearful of renting indefinitely.
“To live on an age pension in rental properties is a recipe for poverty and it frightened me terribly,” she said.
What do lenders consider to be a ‘mature age borrower’?
According to Mortgage Choice broker Caroline Jean-Baptiste, a home loan is generally taken over 30 years and lenders will expect home loans to be repaid by the age of 67.
“Even up to the age of 38, you can still comfortably repay the loan based on nothing changing much, you're not relying on the pay increases or anything like that,” Ms Jean-Baptiste said.
“But there are things that lenders take into consideration when a mature borrower applies for a loan like the ability to service the loan, reasonable term of working life and exit strategy.
“For example, lenders often won't lend to a borrower whose end-of-loan age is 80, because it's unlikely that you'll still be working at 75.
“So you might have to take a shorter term loan depending on the style of work you're in.”
What is an exit strategy?
According to Ms Jean-Baptiste, an exit strategy is essentially a plan of how you are going to repay the loan.
“Let's say you're a 35-year-old applying for a 30-year loan, your exit strategy would be that you would actually pay out the loan within the loan term,” she said.
“So it's not really considered because you are getting a term of the loan that is reasonable within the working life.
But if it’s likely you’ll be retired before the end of the loan term, the lender will strongly consider what your exit strategy is.
Ms Jean-Baptiste explained a few ways to satisfy a lender when proving you can pay your loan while retired.
If you have successfully put away super throughout your working life, using your super to pay the loan off in instalments or a lump sum may be a viable exit strategy.
“You might be able to use ongoing income from your superannuation, or be able to use a lump sum from your superannuation when you retire,” Ms Jean-Baptiste said.
“Now, if you have hardly any superannuation, that's not going to be a strong extra strategy, because the bank is not going to expect all your superannuation to be used to pay out the home loan.”
“Downsizing is often another exit strategy that a lender will consider,” Ms Jean-Baptiste said.
“Let's say you've still got some dependent children and you need a bigger home close to schools or in a better area, but the loan that you take out might not be realistic to repay in your working life.
“If, for example, you're buying a $1.2 million property, you're probably not going to need a house that size when you reach retirement.
“So some lenders consider the downsizing strategy quite reasonable for you to take a 30-year loan.
“Say you've only really got seven years [till retirement], but you've got $700,000 in equity, you could downsize to a $700,000 apartment or townhouse, or even a house in a different location.”
What is the minimum property size to secure a home loan?
For those looking to secure a home, but not able to afford a house and land package, studio apartments can make a great low-maintenance home into retirement.
However, as Ms Gillard discovered, many lenders have a minimum square metre area size they need to approve a home loan.
“I had felt buoyed that a 35 square meter inner city studio was affordable at $180,000 and would make a lovely little nest to retire into so I was devastated to hear that,” she said.
Lenders such as Macquarie and NAB, require a minimum floor plan area of 50 m2.
For many lenders, this will also exclude balconies or car spaces, so be sure to research the requirements for each lender.
See more: Guide to lenders' minimum area sizes
How to apply for a smaller home loan
Ms Gillard said more qualified information on small home loans would save a lot of stress for the tsunami of women like herself – the possible ‘hidden’ and ‘almost homeless’ of the future.
“With a decent deposit, say 30%, repayments on a city studio or a unit in a regional town over 15 years - with a bit of super to exit - could be similar to rental rates in the current market, even considering body corp/strata, council and utilities. I think that knowledge would put many minds to rest and provide some hope.”
If you are trying to break into the housing market following a divorce, migrating to Australia or as a mature age borrower, there are ways to break into the housing market.
Based on her experience, Ms Gillard said more than anything its important to just get started.
“Start planning now. Look at properties that may be in your ballpark and work backwards - ‘how much do I need to earn to make repayments on that little nest?’ - you may be able to pursue a bit of extra work on the side to bolster your income to an acceptable level,” she said.
“Do your homework and get advice from someone in the industry – although I’m still looking for that mystical person who has all the answers.
“Don’t be disheartened by media reports,” Ms Gillard said - do your own homework, get out your calculator and stay in control of your money. Waiting for the answers to come to you is not a plan – go find them.”
Images supplied (Grace Ferrentino)