New mortgage borrowing rules for older Australians may see many being considered ‘too old for a home loan’ unless they have an acceptable exit strategy. And this applies for a new mortgage or a refinance of an existing one, too.
- Starting later in life
- The New Rules for getting a home loan
- If you don’t have an approved Mortgage Exit Strategy
- How this works in real life
- The New Lending Rules you need to know
- What can be in a Mortgage Exit Strategy?
- What happens if my Exit Strategy is rejected?
- Who's the best person to help with your Exit Strategy?
- What's not usually included in an Exit Strategy?
- Are Investment Property loans affected?
- How does this affect self-employed people?
- What are the key takeaways?
- How does this affect you?
It's time to get your home loan right - because you may not have a second chance if you're over 45.
Starting later in life
Many Australians are now buying their first home later in life.
- The average age of a first-time borrower about 34.
But with house prices increasing faster than incomes, many borrowers are kept out of the housing market till their 40’s or need to refinance debts later in life after a relationship breakdown.
The New Rules for getting a home loan
As part of the new Responsible Lending Legislation, banks and funders now require older borrowers to provide detailed evidence showing they can continue paying the loan beyond retirement age or earlier.
- This is called a Mortgage Exit Strategy and without it, you might be deemed too old to qualify for a mortgage.
If you don’t have an approved Mortgage Exit Strategy
If you can’t prove your ability to continue to pay a home mortgage past the age of 65, you may have to settle for a shorter term mortgage (with increased repayments) or miss out completely.
- At best - no approved exit strategy = shorter loan period and higher repayments.
- At worst - no approved exit strategy = no home loan or no refinance permitted.
How this works in real life
Most standard home loans are for a 30-year term with repayments spread out over that same period.
- Under the new rules, a 45-year-old borrower with no exit strategy may be given a shorter loan term of 20 years to ensure the loan is fully repaid by the time they turn 65.
- This can mean a significant increase in monthly repayments and a significant increase in financial pressures on a family.
For example, a quick look at the ASIC Mortgage Repayment Calculator shows the shorter the loan term, the higher the monthly repayments become.
- $500,000 @ 5.5% over 30 years repayment is about $2,850 per month
- $500,000 @ 5.5% over 20 years repayment is about $3,450 per month
This equates to a potential difference of $600 per month or an additional $7,200 pa. for the shorter term loan.
Once you get to age 45, lenders want to know how the mortgage will be repaid when you get to 65?
The New Lending Rules you need to know
Lenders are now required to follow new Responsible Lending Obligations and can only lend to people with the demonstrated capacity to repay a loan without financial hardship.
- Now it’s not enough to have a stable job, reliable income, and large deposit and even the backing of your older parents – borrowers over 50 must have a retirement exit strategy to be eligible for a mortgage under the tough new rules.
So what is meant by financial hardship?
This can change from funder to funder but generally speaking, if the mortgage cannot be repaid without selling the home, the loan may be deemed not suitable for the borrower.
What can be in a Mortgage Exit Strategy?
This could include proof of:
- income and expenses
- employment contracts
- personal assets you could sell sufficient to repay outstanding mortgage debt
- investment property you could sell to repay outstanding mortgage debt
- your Credit Score
- shares and managed investments that can be liquidated to pay outstanding mortgage debt, and
- the balance of your super fund
What happens if my Exit Strategy is rejected?
The funder may knock you back if your Exit Strategy is deemed to be:
- high risk
- unrealistic, or
- doesn’t otherwise meet the individual funders lending policy.
You can expect a formal decline for a loan will appear on your new Credit Score and other funders may see you as a higher risk and decline to do business with you. This is why it's so very important to have your own financial adviser in your corner looking out for your best interests.
Who's the best person to help with your Exit Strategy?
Your Sapience Financial Advisor, because we've been helping our clients finance (and refinance) and advising them on their options for over 20 years.
What's not usually included in an Exit Strategy?
As borrowers approach retirement this normally indicates a significant change in their financial situation and continued capacity to repay a loan.
The following are usually not suitable to consider in an Exit Plan:
- An anticipated Inheritance
- An anticipated Workers Compensation payout
- An anticipated Family Law settlement
- An anticipated employers bonus payment or wage increase
- An anticipated future downsizing to a smaller property
The NCCP Act specifies if the only way a borrower could repay the home mortgage is by selling the property, that would not be considered an acceptable exit strategy.
What happens if you expect to rent forever?
The long-term cost of renting forever is, by the time you retire you can be in real financial stress. If you cannot afford the rental increases in your existing property you're exposed to the very real risk of needing to constantly cover ongoing increases in rent and costs of moving from place to place.
- Older people still renting at retirement age have fewer options and are exposed to increasingly unknown and unplanned financial stresses.
- This becomes more problematic as access to social housing continues to fall and living longer often with declining health, creates additional mobility needs.
- Australia is witnessing a spike in older women over 55 becoming the fastest-growing category of people experiencing homelessness
For more information about the practical financial differences between a Modest standard of living and a Comfortable standard of living, read our article What does a Comfortable Retirement actually cost?
Are Investment Property loans affected?
Investment property loans are currently outside the financial hardship definition as they’re not a principal place of residence. You can sell it anytime without financial hardship. While under the NCCP Act, you’re considered to be in financial hardship only if you can’t pay off a mortgage without selling your home, not all funders have the same approach and may require a Mortgage Exit Strategy regardless.
How does this affect self-employed people?
Many small business owners and self-employed people are financially sound but don’t usually have large sums invested in superannuation. As a result, many are finding it harder to get a home loan or consolidate personal debts into an existing mortgage once they pass 45 and head towards 50.
What are the key takeaways?
- Funders are now required to know how a mortgage can be repaid when a borrower retires from work.
- New Loans for older people are harder to get (and that includes refinancing an existing home loan too).
How does this affect you?
- If you're over 50, expect to be asked for an Exit Plan.
- If your parents are approaching 50 and need to refinance to a lower rate, expect to need an Exit Plan.
- If you want to lend money to your children to buy a property or go co-borrower with them, expect to need an Exit Plan.
- If you’re self-employed or a business owner, get your home loan set and in place before you're 45 or be prepared to be stuck with it until you retire.
- And if your Exit Plan is considered high risk or unrealistic, expect to be told, ‘you’re now too old to get a mortgage.
Now is not the time to be without your own Financial Adviser in your corner looking out for you.