Can Pensioners Get Home Loans?
As you get older, getting a home loan can become difficult. Banks are increasingly reluctant to provide home loans for seniors or finance a mortgage because, as they see it, there are two main challenges.
Firstly, your ability to make repayments, especially once you retire. If you’re already retired and on a reduced income, lenders view this as a higher risk because you may have difficulty keeping up with your repayments. As a result, if they lend at all, the bank is likely to charge you a higher rate of interest than those advertised.
It’s much harder to get a housing loan for pensioners; if you’re a pensioner, some lenders may view you as a higher-risk borrower. This is because the amount you receive from the pension is generally lower than the income requirement to qualify for a home loan.
Secondly, most home loans are repaid over a term of 25-30 years. For older Australians, the mortgage lender may conclude that there’s an unacceptable risk of the borrower passing away before the loan can be repaid.
If you apply for a home loan, your age will be a considerable factor in how the bank assesses your application. The bank will likely want you to demonstrate how you plan to repay the loan with an ‘exit strategy’, the source and quantum of your retirement income and any assets you could sell to repay the loan if necessary.
On the upside, banks look favourably upon those borrowers that have significant equity built up in their home and may use that to balance the risk.
The exit strategy
If your loan term extends into retirement, the lender will want to know how you intend to finance repayments. This is known as an exit strategy and it details how you will pay off your housing loan without incurring financial hardship. Responsible lending rules require lenders to be very cautious if there’s a risk of the borrower facing hardship.
Common exit strategies:
- Superannuation – using your income for repayments or drawing a capital sum to make a more substantial payment
- Downsizing – selling your home and moving into a smaller or lower-cost property
- Selling assets – these may include investment property, shares, or other investments
It’s important to note that most lenders don’t take anticipated windfalls into consideration when assessing your ability to repay a loan and so shouldn’t form part of an exit strategy. These may include an inheritance, compensation payout or some form of settlement or bonus.
A solid exit strategy should take into consideration:
- your age
- your financial position
- your pre- and post-retirement income
- your retirement plans
Ultimately, your exit strategy needs to demonstrate you can maintain repayments without financial hardship. If the bank isn’t convinced, your application for a home loan will most likely be declined.
Refinancing a home loan for seniors
If your current mortgage has been in place for a number of years, there’s a good chance you’re paying a higher rate of interest than those loans on offer today.
Most refinancing requires you to approach a new lender; even with the best repayment histories, they need to know you can continue making repayments for the term of the loan. Accordingly, many of the considerations for a new loan application include the need for a robust exit strategy.
Keep in mind, however, that finding a bank that is willing to refinance once you retire or reach a certain age can be extremely difficult.
Investment loans for seniors
As with a home loan, any lender needs to be sure that you can comfortably meet repayments without facing financial hardship.
Although typically used to purchase a variety of assets (often shares), investment loans can be easier to access for retired Australians for several reasons. Firstly, the bank can use your primary residence as collateral for the loan. Secondly, the rent you receive from the investment property can help meet repayments. Finally, if your financial circumstances were to change and you were at risk of financial hardship, you can sell the investment property to pay off the loan.
Download Free Guide
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.
You may also like