Apr 27, 2022
So in today's episode I want to talk about borrowing for people who are aged 55 and over and what that looks like when it comes to getting a loan if you'd like to get in touch i'd love to hear from you please give me a call 10423 475 or send me an email at jp australianpropertypodcast.com.u and please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions so what i want to talk a bit about today are the requirements of obtaining a mortgage um basically when you are typically 55 or over now i've picked the number 55 just sort of as a random figure as that is generally around the time that i think lenders start to be more concerned around the loan term and the exit strategy i do want to clarify that personally i don't think 55 is actually old um you know it seems a lot of people are actually in their prime around that time and so look that you know is a whole separate discussion and i hope that banks revisit this um in more detail later but um that's i guess the rationale for using that figure um and so a number of lenders will actually be tighter um you know than this however and even ask for exit strategies for people much younger so even people who are within 30 years of 65 so from as young as 35 lenders you know may be asking about what the exit strategy is but look for today's chat the focus is um the older borrower demographic so um we do see a lot of people who are in the range of say 55 to early 60s who are still working and they want to borrow more to buy a property typically for owner occupied purposes now the challenge is that a lot of lenders consider the standard retirement age to be something in the region of more like 65 to 70 and so when they look at the application you know a lot of lenders would be comfortable with say a 15-year term taking someone from say 55 up to age 70 but the challenge is that most people want a full loan term so they want the full 30 years and that's typically because they want to have more manageable repayments which makes sense and this is where we need to basically get into something with the lender called an exit strategy so basically the exit strategy is how you actually intend to pay off this loan and so basically lenders will basically want to see how you're able to actually pay off this mortgage and then still have enough funds left over to live on in retirement without actually relying on the age pension and that is a critical point even if it is a multi-million dollar house um the banks don't like relying on that age pension as the pure source of income um there may be lenders that will consider it but as a general thing it's it's not loved by lenders um and the other bit here is that banks we'll also look at your overall sort of lifestyle and the judgement call as to you know whether the exit strategy is reasonable or not will sort of be um you know based on that so for example what we um you know a lot of people um their plan is the main sort of strategy in their retirement is they're going to downsize you know potentially from a house um you know maybe they've raised a family maybe it's in a capital city and they're thinking that you know they don't need the space anymore they want to free up some of that equity and so a lot of people will do the traditional downsizer route where they might buy maybe say an apartment when they reach retirement age or maybe they will move to um you know like a coastal area nearby or something like that where it might be more regional and there might be cheaper real estate now um you know this is a common thing you know where people are doing just downsizing and so um an example of something that lenders you know would potentially accept is your sort of standard example maybe it was a one million dollar house um they're gonna sell up and they're gonna buy maybe a two bedroom uh maybe within an hour or two of where the other house uh was a lot of lenders will typically look at that and and consider that reasonable and then in terms of how much money you actually need left over after buying a property there isn't a specific rule but in the past what i've worked off was roughly 400 000 in cash plus the property being owned outright so in this example to use those concrete figures basically you would need an outright property of about 400 grand plus in this example plus 400 000 cash so basically net worth of 800 000 plus some funds to cover stamp duty etc and that would be something that i think you know a lot of lenders would consider as an exit strategy and so you know if you could demonstrate your net worth to say 800k plus uh currently that's where we could look at trying to argue for a full term um and you know basically explain that you'd be downsizing from this future larger purchase back down to say the 400k property later now this is relevant though like it is adjusted depending on you know where you are living now so for example if you're in like a five million dollar house you know it's going to be less realistic that the lenders will believe that you're going to go down to something you know of that lower value so you know they are going to sort of um adjust the lifestyle expectations accordingly um so that will you know depend on i guess what you're looking at but you know having discussed um you know exit strategies for so many people um you know i've been doing this more than six years now and a lot of people actually do plan to move to a different area in retirement you know often slower pace cheaper properties so you know it may um still be viable that you are moving down to a much lower value property if you can sort of explain that you know your retirement plans have you know always been around moving to a specific area and you like it because you've got family there or whatever the reason may be so there's always more to the story but those are some high level numbers now in terms of the assets that are actually taken into consideration for this exit strategy test i'm going to go through a couple of examples so firstly there is the amount of cash that you've got on hand then they're going to look at any financial assets you own you know shares managed funds that kind of thing then they're going to look at the equity that you have available in the property they're going to look at any other investment assets you own maybe you own appreciating gold or art or something like that um and the other thing is also if you are self-employed um the story does get a little bit more uh there's a bit more to it if your business is of a size that could potentially be resold then it could be potentially possible to position this as like an exit strategy to the lenders so this is very case by case but for example let's say you have a company maybe you've got 50 staff or maybe not even anywhere near that number but let's say you've got a number of staff businesses been established for a long period of time and it's you know quite clearly profitable you know it may be viable that you know you could potentially sell it down the line you know maybe it might trade for three four times the their earnings which is um you know quite common for private market businesses and then we could look to potentially explain that you've got that equity in the business that will be realized when you do one retire another thing i have seen for self-employed is if you do have all the management in place the business runs itself then we may not have such an issue with the loan term in terms of uh you know you retiring at 70 because if you've got you know a ceo and other managers in place you know we can make the argument that even if you stop working the business is going to be ongoing and your income is subsequently going to be ongoing as well and you can also accept gifts from family including from your children so gifts can go in reverse as well um you know i guess the typical one that we see is that people get divorced and then they want to sort of buy another place you know on their own and this is a common scenario and um and you know basically it can be done in reverse you know your children can potentially gift you funds uh to go toward your purchase um one thing i do want to mention is that in general lenders don't normally want to rely on future inheritances and that is a question i receive commonly and i guess to surround this out um the big challenge when it comes to these kind of applications is that when someone needs a high loan to value ratio plus you know the full loan term and they don't have any other assets you know the key problem with these is that you know the bank can't see how you're going to pay off the loan and so they won't like it the classic one is you know where we get someone maybe age 60 to 65 they have very little in super and they're wanting to borrow say 90 on a full 30-year term um and these are just very tough to work with because you know the lenders can't see a clear pathway as to how someone you know can potentially pay off like a 90 loan um at that age plus have enough money to um to live in in retirement uh and you know that's where the 90 percent you know starting at like a 90 loan it leaves you very little equity to downsize with so that's the biggest challenge with those ones now the other thing i haven't mentioned here is super super is obviously taken into account here it's basically considered as a liquid asset assuming um you know you are of the age that you can access it so super is a key one uh but you know i'm assuming that you don't have a huge super balance and that's why i've addressed a lot of these other um you know approaches today uh that being said if you've got a lot of money in super that typically can provide the exit strategy to the lenders that they're looking for that you will just basically access that pay off the loan and then you'll draw down you know the rest of your super dependency live on later so that can be potentially accepted by some lenders now whether this obviously is a good idea or not and how you use your super you know that um you should seek a financial advisor's advice on but from a credit perspective i just wanted to talk through some of the things today that lenders are going to look at when it comes to considering you for say a 30-year loan term if you are in the later years of your career so please as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions i'm a licensed mortgage broker only and do not give financial advice really appreciate you tuning in as always thank you so much