Some things in life get simpler as you get older. Conversely, some things seem to get trickier, like sorting out your finances. A potentially tricky area to navigate as you approach retirement is the family home, what to do with it, and how to get a new home loan as you get older.
If you’re older than say, 50, you’ve probably already heard of terms such as 'reverse mortgages' and the 'pension loan scheme'. Find out how to get a mortgage as a senior or pensioner, and find out how these different products and strategies can work for you as you go grey.
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Pensioner Home Loans Explained
There’s nothing particularly secret the banks don’t want you to know about home loans as you approach retirement. Think of it from their perspective - to be brutal, they’re going to consider your risk of dying while still owing potentially hundreds of thousands of dollars to them, and your estate’s ability to pay that back.
Older people - generally anyone over 50 - are seen as higher risk to banks and lenders. Before approving a loan to an older person, many lenders require the borrower to have what’s called an 'exit strategy'. And no, it’s not how you’ll jump out of a plane in the event of an emergency.
What is an exit strategy?
An exit strategy is essentially a plan you present to your bank or lender on how you’re going to pay off your home loan in retirement. Many lenders require some form of exit strategy when the borrower is older than 50. The strategy may be more acute as you get older. Being that most regular home loan terms are 25-30 years, there are no guesses as to why. Many lenders also want older people totally off their books by the time they are around 80. Eighty minus thirty is… wow, fifty!
Various ways you can bolster your exit strategy is to:
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Provide evidence you can pay off the home loan in much less than 25-30 years.
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Show them your superannuation balance and how you can continue to pay off a home loan in retirement.
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Show them your existing property portfolio, and the potential capital gains from selling these off, whether you’re downsizing or just paring down assets.
To put a long story short, a pension by itself is probably not going to be enough to satisfy a lender's requirements. However, just because you’re on a pension doesn't necessarily mean you're short of money - a bank is going to assess not only your income or lack thereof, but your assets - superannuation, existing properties and so on, as well as your ability to pay off a home loan in less than 25-30 years.
Pensioner or Senior Home Loan - Exit Strategy Case Study
Penny Shun is 50 and looking at getting a home loan worth $500,000 for her new investment property she’s worked hard to find.
Her bank, Batbank, has asked her for an exit strategy, because the loan she's applied for is a 30 year one, and they want to know that she would have the means to pay it off well before she’s 80. She also said she plans on retiring at 65 after a long career tending alpacas.
She shows Batbank the value of her existing property - a home she bought 20 years ago in Mosman that has increased in value just about ten-fold. She has no other debts, and her super balance is already $500,000 with 15 years of work left, earning $150,000 per year. By her calculations, she’s earning enough now that she can comfortably afford to pay off the home loan within 20 years.
While she'll have no employment income for the last five years of the loan, Batbank determines that her super balance, along with the value of her current home, means she can more than comfortably service the $500,000 loan on her investment property.
Other Housing Finance Options for Seniors or Pensioners
Applying for a home loan when you’re older can be a little tricky sometimes, but luckily there are a few options that could be workarounds.
Bridging Loans
As the name might suggest, bridging loans bridge the gap in financing between selling your old home, and buying a new one. This covers a short term gap in any funding you may have while you’re waiting for your old home's sale to settle. This form of financing is contingent on you selling or downsizing your old home to buy a new home. Bridging loans also attract steeper interest rates and shorter terms than regular home loans, but if all you are waiting on is your old home to settle, paying it off quickly to minimise the interest cost usually isn't an issue.
Reverse Mortgages
A reverse mortgage unlocks the equity in your home so you can access the money to fund other pursuits. These loans usually only apply if you’re over 60, and could attract steeper interest rates. The way this is designed to work is that you repay the loan in full when you die through your deceased estate. This helps provide steady cashflow in retirement, but there's a lot of considerations to make.
Line of Credit Loans
While not technically tied to your home, a line of credit loan is commonly offered to retirees or those nearing retirement. A line of credit loan essentially lets you access extra funds whenever you want, rather than a personal loan which usually has a fixed term of repayment. The ‘'revolving door' type of deal with a line of credit loan means the convenience often comes at a price in the form of higher interest rates or fees. Another consideration, too, is that these types of loans usually max out around $50,000, rather than the hundreds of thousands usually required for a new home.
Government Assistance - Home Ownership in Retirement
There are a few government-based financing options to sweeten the deal when buying or owning a home when you get older or approach retirement.
Pension Loans Scheme
The PLS is a scheme that lets older Australians get a non-taxable fortnightly loan from the Federal Government. It uses real estate as security for the loan, and you can choose the amount you get from the government. The PLS at the time of writing charges an interest rate of 4.5%, compounding each fortnight on the outstanding loan balance.
Housing Finance Loan
Your state government may offer housing finance to those who can afford to build or buy a home but cannot access finance from a bank or lender. In Queensland, for example, the loan amount is based on incomes, terms of the loan, current market interest rates, and the value of the home you want to build or buy. It comes with a minimum deposit requirement of 2%.
Downsizing Super Contributions Scheme
A fairly recent addition to the retirement income landscape, the scheme allows those aged 65-plus to make a 'downsizer' contribution into their superannuation of up to $300,000 using the proceeds from selling their home. This does not count towards your contribution caps, however it will determine your eligibility for the age pension. If you’re downsizing, using this could be a good opportunity to funnel some of that money into your super to look forward to in retirement.
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Photo by Sam Williams on Unsplash
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