Have you or anyone you know, applied for a home or residential investment loan, only to be told that your loan application cannot be approved due to your age?
Most lenders will require either a strong exit strategy or a reduced loan term for borrowers that are aged 50 years or older. This is because, most lenders deem the retirement age to be 75 years old. Therefore, they want to ensure that anyone taking out a loan will have paid it off before the age of 75 and where this is not possible, they will be looking for an indication as to how the remaining loan balance will be repaid after a borrower has retired without putting the borrower into financial hardship.
So, if you are in this situation, one of the most important considerations you will need to think about before applying for a loan is what your strategy to pay out your loan post retirement might be?
There could be many ways you can potentially repay your loans post retirement, such as (but not limited to):
- Sale of investments – using the sale proceeds to pay down any remaining debts;
- Downsizing – if your only asset is your home, selling your home and buying a smaller / less expensive one and using the surplus sale proceeds to repay remaining debts may be a viable option. It should be noted however, that this is not an acceptable exit strategy to all lenders;
- Superannuation – you may have sufficient funds or assets in superannuation that may provide the ability to either repay remaining debts out or income that allows for the maintenance of loan repayments;
- Continuing income stream – if you have passive investments that will continue to provide you with a strong income stream post retirement that is sufficient in meeting the loan repayments of your remaining debts, at the lender’s sensitised assessment rate;
- Continuing business income – depending on the type of business you own and its reliance upon you, lenders may accept that a business can still operate without you post your retirement, as it may be under management and requires little or no input from you. This of course all depends on you retaining ownership of the business and the lender’s willingness to accept such a scenario.
If on the other hand you cannot demonstrate any of the above potential exit strategies and have no other viable option, you may need to consider a reduced loan term. That is, if you are 50 and the lender you are applying to considers the retirement age to be 75, you may be better off applying for a 25 year loan term as opposed to the maximum 30 years. However, this all depends on your ability to evidence the capacity to repay a loan over a 25 year period.
If in doubt, get in touch and we can help you formulate a suitable application strategy to your specific circumstances. We have helped many clients in similar situations with major and non-major lenders.
The most important thing is to ensure that you are entering into a loan arrangement that will NOT put you under unnecessary pressure or see you go into hardship.
Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.