Whether you want to downsize, retire, or seek a radical change, there are a number of mortgage options for seniors and retirees.
Some things in life get simpler as you get older. Conversely, some things seem to get trickier, like sorting out your finances. One 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 over 50, say, you’ve probably heard of terms like “reverse mortgage” and “pension loan plan”. Find out how to get a mortgage as a senior or retiree, and find out how these different products and strategies can work for you when you go gray.
Buying a home or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.
Home loans for retirees explained
There’s nothing particularly secret that banks don’t want you to know about home loans as you approach retirement. Think about it from their perspective – to be blunt, they’re going to consider your risk of dying while potentially owing them hundreds of thousands of dollars, and your estate’s ability to pay that off.
Seniors – typically anyone over the age of 50 – are considered a higher risk for banks and lenders. Before approving a senior loan, many lenders require the borrower to have what is called an “exit strategy”. And no, that’s not how you’ll jump out of a plane in an emergency.
What is an exit strategy?
An exit strategy is basically a plan you present to your bank or lender on how you are going to pay off your mortgage in retirement. Many lenders require some form of exit strategy when the borrower is over 50. The strategy can be more acute as you get older. Since most mortgage terms are 25 to 30 years, it’s not clear why. Many lenders also want seniors off their books before they turn 80. Eighty minus thirty is… wow, fifty!
There are a number of ways you can strengthen your exit strategy:
Provide proof that you can pay off the mortgage in less than 25-30 years.
Show them your retirement pension balance and how you can continue to pay off a mortgage in retirement.
Show them your existing real estate portfolio and the potential capital gains from their sale, whether you’re downsizing or just downsizing.
In short, a repo on its own is unlikely to be enough to meet the requirements of a lender. However, just because you are in receipt of a pension does not mean you are necessarily strapped for cash – a bank will assess not only your income or lack thereof, but also your assets – superannuation, existing properties, etc. . like your ability to pay off a mortgage in less than 25-30 years.
Home Loan for Retirees or Seniors – Exit Strategy Case Study
Penny Shun is 50 years old and looking to secure a home loan worth $ 500,000 for her new investment property that she has worked hard to find.
Her bank, Batbank, asked her for an exit strategy because the loan she requested is for 30 years, and they want to know that she could afford to pay it back long before she is 80. She also said she was planning on retiring at age 65 after a long career caring for alpacas.
She shows Batbank the value of her existing property – a house she bought 20 years ago in Mosman that has almost risen in value. She has no other debts and her super balance is already $ 500,000 with 15 years of work remaining, earning $ 150,000 per year. According to her calculations, she is earning enough now to comfortably afford to pay off the mortgage within 20 years.
Although she will 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 that she can more than comfortably pay off the 500,000 loan. $ on his investment property.
Other housing finance options for seniors or retirees
Applying for a home loan when you’re older can be a bit tricky at times, but luckily there are a few options that could be workarounds.
As the name suggests, bridging loans bridge the financing gap between the sale of your old home and the purchase of a new one. This covers a short-term gap in any financing you may have while you wait for the sale of your old home to settle. This form of financing is conditional on selling or downsizing your old home to buy a new one. Bridging loans also attract higher interest rates and shorter terms than regular home loans, but if all you’re waiting for is to pay off your old home, paying it off quickly to minimize interest charges isn’t. generally not a problem.
A reverse mortgage unlocks the equity in your home so you can access the money to fund other activities. These loans usually only apply if you are over 60 and might attract higher interest rates. The way this is designed to work is that you pay off the loan in full when you die through your deceased estate. This helps provide stable cash flow in retirement, but there are a lot of considerations to take into account.
Line of credit loans
While not technically tied to your home, a line of credit is generally available to retirees or those nearing retirement. Essentially, a line of credit loan allows you to access additional funds whenever you want, rather than a personal loan which usually has a fixed repayment term. The revolving door type of agreement with a line of credit means that convenience often comes at a price in the form of higher interest rates or fees. Another consideration is also that these types of loans are usually around $ 50,000, rather than the hundreds of thousands usually required for a new home.
Government Assistance – Access to Home Ownership in Retirement
There are a few government financing options to sweeten the deal when buying or owning a home as you get older or near retirement.
Retirement loan plan
The PLS is a program that allows elderly Australians to obtain a tax-free bi-monthly loan from the federal government. It uses real estate as collateral for the loan, and you can choose how much you get from the government. The PLS at the time of writing charges an interest rate of 4.5%, compounded every fortnight on the outstanding loan balance.
Housing Financing Loan
Your state government may provide housing finance for those who can afford to build or buy a home but cannot access financing from a bank or lender. In Queensland, for example, the loan amount is based on income, loan terms, current market interest rates, and the value of the house you want to build or buy. It comes with a 2% minimum deposit requirement.
Super contribution reduction scheme
A fairly recent addition to the retirement income landscape, the plan allows people aged 65 and over to contribute up to $ 300,000 towards their retirement pensions using the proceeds from the sale of their homes. This does not count towards your contribution limits, but it will determine your eligibility for old age pension. If you are downsizing, this could be a good opportunity to funnel some of that money into your super to hope for retirement.
Photo by Sam Williams on Unsplash
The entire market was not taken into account in the selection of the above products. Instead, a smaller part of the market has been envisioned, which includes the retail products of at least the Big Four Banks, the Top 10 Customer-Owned Institutions and Australia’s largest non-banks:
Products from some vendors may not be available in all states. To be taken into account, the product and the price must be clearly published on the website of the supplier of the product.
In the interest of full disclosure, Savings.com.au, Performance Drive, and Loans.com.au are part of the Firstmac group of companies. To learn more about how Savings.com.au handles potential conflicts of interest, as well as how we are paid, please click on the links on the website.
*Comparison rate is based on a loan of $ 150,000 over 25 years. Please note that the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as draw charges and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.