While most home loan talk is centred on first home buyers or middle-age investors, relatively little is said about the elderly. In some regards, this is understandable - after all, with the majority of their working life behind them, most seniors have probably already settled into a home they're comfortable with and are looking forward to enjoying their golden years in peace.
However, there are still many circumstances in which a senior may want to take out a home loan. For example, they may wish to move into a new, smaller home, relocate to closer to be family or perhaps even purchase a new house to add to their existing property portfolio.
While the reasons may vary, there are some important factors that everyone needs to take into account. If you've reached retirement age and are considering taking out a home loan, make sure you can answer these four questions:
1. What's the maximum age I can take out a home loan?
Even with the property markets in many parts of the country gradually reaching something of a plateau, Australian house prices are still the 10th fastest growing in the world, according to a report from real estate experts Knight Frank.
With this in mind, it might not come as too much of a surprise that credit providers are typically more strict with issuing home loans to seniors. While some banks don't have a specific age limit, many will require those over the age of 50 to provide more comprehensive details of their financial situation than a younger borrower, as well as a viable exit strategy.
Kim Cannon, managing director of Firstmac (parent company of loans.com.au) requires older borrowers to show how they would be able to meet their financial obligations after retiring.
"If a loan applicant is approaching the deemed retirement age of 67 we would ask them to demonstrate their ability to meet the repayments or clear the debt once their working income stops," said Mr Cannon, as quoted by news.com.au.
2. What is a reverse mortgage?
Entering into retirement opens up some interesting financing options that aren't available to you in other stages of life. A reverse mortgage, for example, can greatly improve your quality of life in your golden years, but only if it's used wisely.
So, what is a reverse mortgage? The Australian Securities and Investments Commission (ASIC) explained that it enables you to borrow money, using your home's equity as leverage. This credit can be issued in a regular income stream (a weekly or monthly payment, for example), a lump sum, a loan or a mixture of all three.
Reverse mortgages can help keep you comfortable in retirement, but there are some risks to be aware of.
As with all lines of credit, there are some risks with taking out a reverse mortgage. ASIC pointed out that interest is applied to the loan, with the main difference being you don't have to pay it back until you sell your home, pass away, or move into care. The interest rates on a reverse mortgage are also usually higher than that of home loans, and the income it provides may affect your pension eligibility.
To combat the risks involved with reverse mortgages, the government implemented negative equity protection in 2012. Essentially, this law means that regardless of how long you live in the home, you will never owe more than your property is worth. Therefore, if you sell the house for more than the size of your debt, you will receive the difference in cash.
Despite these safety measures, reverse mortgages are very complex structures, so make sure you get unbiased financial advice before committing to anything.
3. How can I leverage my superannuation?
Your superannuation provides significant financial support in retirement.
While there are some extreme circumstances in which you can access your superannuation earlier in life (critical financial hardship or some medical conditions), the vast majority of people can only do so in their senior years. The Australian Taxation Office (ATO) outlined the three factors that will enable you to unlock your super:
- You've had your 65th birthday.
- You reach preservation age (60 years old if born after 1964) and retire.
- You're continuing to work while transitioning to retirement.
While many people will choose to access their super as an income stream (perhaps paid out to them on a monthly basis), withdrawing it as a lump sum does provide some interesting opportunities. For example, you could use it to pay off your home loan or buy a new investment property. Savvy buyers who are able to purchase in the right location and at the right time may be able to earn greater passive income than if they'd left it in their super fund.
Of course, there is a significant amount of risk in such an endeavour. A more prudent move would perhaps be to sell your existing house and combine the money with a portion of your super to buy a more comfortable home that will see you through retirement.
4. How can I pay off my mortgage on a pension?
Sticking to a budget and exploring supplementary income streams can help you pay off your mortgage.
In an ideal world, you'll have paid off your home in full before you reach retirement age. Unfortunately, this isn't a reality for many people. In fact, Jeremy Cooper, executive at investment management firm Challenger, explained to The Australian that 35 per cent of homeowners aged between 55-64 are still paying off their mortgage. In 1994-95, this number was only 10 per cent.
So, how can you pay off your mortgage on a pension? First of all, let's take a look at how much retirees might expect to receive.
The Department of Human Services asserted that a single pensioner is eligible for a maximum of $648.40 per fortnight, while couples may receive up to $1,296.80 over the same period. After taking living costs into account, it's highly unlikely that this income alone will be enough to pay off your mortgage. You can use our home loan calculator to find out your borrowing power according to your own income.
This highlights the need for seniors to explore additional streams of income. While financially volatile ventures should be avoided, monetising a hobby, working in a part time role or pursuing low-risk investment opportunities may help you meet mortgage repayments. Alternatively, seeking assistance from working-age children (perhaps with a financial or equity-based incentive in the event of your death) may be beneficial for all parties.
Retirement is an exciting new chapter of life and one that comes with some interesting new financial opportunities. While there are some extra factors at this age to consider when taking out a home loan, there are a number of things you can do to reduce this risk to ensure your golden years are lived out in peace and comfort.
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