Client Scenario | Refinancing a home loan during the transition to retirement

Bigger loans and buying later in life means more Australians are reaching retirement age with a sizable mortgage. Currently, more than one third of retired Australians make P&I repayments on a traditional bank mortgage each month, a number expected to grow over the coming years.

This means your clients have to make regular repayments from a fixed income, one that is also under pressure from increasing rates, the rising cost of living and volatile investment markets. How can you help clients better manage this debt and enjoy a more comfortable retirement?

This scenario is based on a real life situation, although names and places have been changed to protect client confidentiality.

Maria, aged 66, is single and lives in a two bedroom apartment valued at $900,000. At the time her Household Capital reverse mortgage application was received, she was not eligible for the Age Pension; she had not reached age eligibility and continued to work part time while transitioning to full time retirement.

Maria had a small mortgage and some credit card debt. Because she was only working part time, it had become increasingly difficult to meet the P&I repayments. This became more challenging once interest rates increased. Maria also needed a new car and wanted to travel to Italy to see her family one last time.

Maria was able to access 26% of her home equity, an amount of $234,000. Through her broker, she applied for an ORIO100 loan, for the amount of $210,000. This was allocated as follows:

• $140,000 to refinance the mortgage and discharge her credit card debt – by using an ORIO 100, she elected to pay interest only, rather than P&I
• $70,000 for a new car and holiday; this sum would be drawn as required (note: five year expiry)

At the time of settlement, Maria’s monthly interest only repayment was $956 p/m on the drawn amount of her loan. The ORIO 100 has a lower interest rate than the regular Household Loan and, by paying interest, she is not subject to compound interest being added to her total loan value. Once she retires, Maria can elect to convert the loan to a regular Household Loan and will therefore not be required to make any further regular monthly repayments.