Life is meant to begin at 40.
You're older. Wiser. Better equipped to deal with the world and what it throws at you, except, apparently, when it comes to obtaining a mortgage.
The stumbling block if you are over 40, is a bank's requirement for an exit strategy. Essentially, to meet their obligations under the NCCP (National Consumer Credit Protection Act 2011), the banks want to know that when you hit retirement, you still have the means to pay for your home.
Subsequently, the over 40 demographic, which, generally speaking, has money in the bank and a collectively decent income, is pretty much in the same boat as millennials (who are deemed to be paying too much for avocado on toast and not saving for a deposit), when it comes to buying a home.
That's not to say you won't get a loan. You just have to meet certain criteria.
Brendan Dixon, Managing Director of Sydney-based Pure Finance explains, "If your home loan term continues beyond the retirement age of 65, you will require an exit strategy. This is required because of a provision in the NCCP that a loan will be presumed unsuitable if it could only be repaid from the sale of the family home.
"To be clear, this is in relation to owner occupied property loans and is not as big of an issue for investment properties because the exit strategy in that case is to sell the investment and this doesn't impact the customer's living arrangements.”
Port Finance Group Director Anthony McDonald reiterates the point: "Banks have become stringent on exit strategies, so borrowers need to be able to demonstrate they can pay off their mortgage when they hit retirement age.
"It's pure logic really. If you apply for a loan at 40 and you retire anywhere from age 65, how can you demonstrate that you still have finance in place to pay back the bank.”
Have your exit strategy ready
By the age of 40, a lender may shorten your loan repayment period to ensure the loan is paid by the time you retire at age 65 to 70.
By the age of 50, you will need to illustrate that you can repay the loan before you hit the age of 70 to 75. A good way to do this is to use the InfoChoice Borrowing Power Calculator. Take a conservative approach. Budget for 25 years not 30 and if you see you can comfortably make the payments, go ahead and scope out an appropriate lender.
At age 60 you are in danger of missing out altogether, unless you have assets you can use as security such as an investment property or a significant, ongoing stream of income.
As Dixon says, "The banks will only accept exit strategies that are realistic and quantifiable. An example might be that the customer will use a lump sum superannuation payment to pay any remaining balance out when they reach retirement so for this exit strategy, the bank will want to see a superannuation statement.”
Demonstrate your capability
The best thing you can do before you decide to take out a loan is write an exit strategy document.
The document should detail how you intend to repay your loan once you reach retirement age.
McDonald points out several strategies to be used including downsizing or the knowledge that an inheritance is on its way. Then there is superannuation, assets under management including investment property, shares, financial position and income to consider. You should also consider whether you intend to sell the property, or hand it down to the kids.
Superannuation could be your secret weapon.
"The most effective thing to do is to advise the bank that you will use your superannuation to pay out any residual loan balance at retirement, Dixon says. "Another would be the sale of investment assets such as an investment property or shares to clear the debt. Or, alternatively, a simple solution is to reduce your loan term so that it coincides with your retirement age.
"Just be mindful with this last strategy that the shorter the loan term, the higher the mortgage repayments.”
An exit strategy may look like this:
|Retirement age: 70|
|Current superannuation: $300,000|
|Investment property: Current value $300,000 no mortgage|
|Loan application: $500,000|
This doesn't take into account appreciation of assets, including the property you wish to purchase, your investment property and your superannuation balance at time of retirement.
Going by that scenario, you should have money to spare.
Don't go in blind
The more information you have about how to exit your mortgage, the better prepared you will be to pay it off long-term.
Banks like to see security, so if you can demonstrate a low risk factor then you shouldn't have any issue convincing them that your looming retirement (albeit 20 years away in some cases) isn't an impediment to your lifestyle.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.