Are you too old for a home loan?
Obtaining a loan is linked to the income that’s needed to meet the loan repayments. So if you are approaching, or have already made the step into retirement, could you still obtain a loan? The simple answer is yes, but of course this comes with some caveats.
Older applicants seek loans for a number of reasons. They may want to expand their investment portfolio, they might be recovering from the financial effects of a divorce or failed business enterprise, or they may just wish to purchase a new home. These are all valid reasons for seeking a loan for residential property, and indeed, can be an integral part of retirement planning.
Whatever the reason, lenders must assess your request for finance by looking at your capacity to repay the debt. This is true for every application, regardless of the applicant’s age. They will also consider factors such as your credit history and the security offered, but first and foremost, they must consider how you can repay the loan. They do so to ensure the loan will not place you under financial stress, and of course, to ensure the loan is not a risk for them.
So if you are at - or approaching - retirement and your income is about to change, how can a lender justify granting you loan with a 25 or 30-year term? The answers lies in considering how the loan is to be repaid in the long term, and not in the assessment of your current income. Yes, the lender will look to your normal income to clear the debt, but if you plan to retire before the debt is cleared, they will then look at what income sources will remain past that date. These might include rental income, investment income or a generous superannuation income stream. A detailed plan from an accountant or financial planner is a helpful tool in these circumstances, but it needs to demonstrate that not only can the loan be paid from your post-retirement income, but that you can maintain a lifestyle without undue financial stress.
If that can’t be demonstrated, lenders will assess if you have an alternative exit strategy i.e. another way to clear the debt. This usually takes the form of the sale of an asset such as shares or an investment property, or if required, the part redemption of some of your superannuation assets.
Critical in this assessment is asking the question: how long until you expect to retire? This will determine to what extent you can build the value of your assets and how much your loan will reduce by. For example, if you are a fit 55 and expecting to work until you are 70, you have significant time to not only reduce the loan balance, but also build up your superannuation balance, your share portfolio, and other assets. If, however, you have only two years until you plan or are obliged to retire, you will need to have an alternative exit strategy in place.
The most common asset put forward as an alternative exit option is superannuation. Be aware however that lenders are very cautious about this. Indeed, many lenders will not accept superannuation as a legitimate source of funds to clear debt unless the holdings are very large. Why? Because superannuation is, by definition, designed to meet your living needs in retirement, and not to pay off debt.
So, if you are retired or nearing retirement and looking for property finance, the assessment by your lender will be completely different compared to that of a younger applicant. While this may sound like common sense, many applicants don’t consider the pitfalls of new borrowings or the many options available to them. To address this, banks often request that applicants at or near retirement seek financial advice prior to entering into a loan contract because it is a critical decision, and financial mistakes heading into retirement can be devastating. As always, we recommend you use a professional such as a financial planner to assist you to build a strategy, and a trusted finance consultant to get the right loan advice, not just a loan.
Adrian Sheahan is the manager of lending operations at Switzer Home Loans. Contact him today for a free loan health check.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Published: Tuesday, March 07, 2017
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