Ask Paul: Am I too old to apply for a loan for investing?
Is there a maximum age for applying for loans for investments?
I'm 47 (and a half), have all my estate planning sorted, a healthy amount in superannuation, my insurances buttoned up and am busy investing (thank you, Paul Clitheroe and the Barefoot Investor, Scott Pape).
I currently have a primary residence and two investment properties, all with loans of about $270,000, which are in growth areas and are manageable on my salary or with tenants.
I also have $30,000 in direct shares, listed investment companies and exchange traded funds, which I plan to keep adding to.
I'm thinking that as I get older, I may need to be a bit more strategic in my investing. So, I would like to know if there is a maximum age for applying for loans? - Tina
This is an interesting question, Tina. It is very relevant to most Money readers - if not for themselves, for their family and friends. So, let's start with the big picture.
Life expectancy is a key factor. We all know that on average we are living longer. But I am pretty sure many do not know how dramatic this is. We only need to go back about 160 years to the 1860s and we find that life expectancy, even in the longest-living countries, was younger than 40 for women and worse for men.
Then we jump forward to 1908. This is the year when Australia started its age pension system. Our leaders at the time decided an age pension should be in place for men once they reached the age of 65. The logic was quite interesting.
The pension was seen as a safety net and only for the small percentage of men who reached age 65. In 1908, male life expectancy was 58. The idea that a taxpayer pension would fund a long retirement was just not contemplated.
An extraordinary increase
If we return to the 1860s, we see that since then life expectancy has increased by around three months for every year. That is extraordinary.
As we read the news, it's clear life can be ugly. Wars, diseases and accidents fill our newsfeed each day. In fact, good news is usually absent. We cannot overlook dreadful global and local events, but I think we should also focus on the incredible doubling of average life expectancy, in a historically very short time.
The world has always had awful things happening. Humans are at times, not especially nice, in particular in our own religious, geographic and cultural tribes.
Then we add plague, pestilence, drought and flood. Sadly, it has always been so and undoubtedly will be in the future. But we cannot ignore the fact that a vast majority of the world's population is living a better and longer life than at any time in history.
Certainly, as I answer your question, at age 68 and in good health, I do reflect on how fortunate so many of us are.
Based on 'average life expectancy', I am very grateful for the extra 30 years of life I have enjoyed compared with the average bloke in the mid-1800s and equally pleased about the extra 10 years since 1908. Women, of course, have always 'on average' lived a few years longer.
We'd be nuts not to go for it
From here it becomes clear that borrowing later and for longer just makes sense.
Now we move to economics. The Reserve Bank targets an inflation range of 2% to 3%pa. As we all know, it is well above this at present.
Inflation does a number of things, but for loans and property a key issue is that, along with a growing population, it drives up the price of property. Second, it destroys the real value of a loan. This is very powerful stuff, so we would be nuts not to use these two factors to increase our wealth.
Few of us can afford a property for cash. So, we borrow. Very reasonably, a lender wants their money back, with interest. This requires two things.
First, a well-located property with a realistic and achievable valuation. Then pop down a reasonable deposit, say a minimum 10% and preferably 20% to avoid insurance that protects your lender, and the lender already feels pretty good.
If things go bad for you, can they sell for 80% of the price you paid? The answer is yes if it's in a good location with jobs, schools, infrastructure, entertainment, public transport and decent coffee.
But they don't want you to sell up, so the next point is whether you or, in the case of a rental property, you and the property have the cashflow to make the repayments.
For decades, I have banged on about testing yourself at least 3% above the current rate, and suggest an emergency test at 5% above the current rate. This is mainly because in 1990 our mortgage hit 18.75%. It was not pleasant, but by selling cars and slashing spending, we saved our homes.
Deposit and cashflow
Let's wrap up. Thank you for the kind comments about both Scott Pape, a good guy, and me. It is not about age. Providing you have a deposit to buy a well-located property in a growth area and the cashflow to fund repayments, your age of 47 is not a factor.
For older investors, in particular with our super system, age becomes even less of a factor. Older investors and potential homebuyers will need to have the usual deposit and capacity to repay, but they will have to add an 'exit factor'.
If you are in your 50s, 60s or even beyond, it is obvious a lender must ask you for your exit strategy. This may be investment income from your shares or investment property; it may be a pension from your own super in time to come. Or at retirement it could be a withdrawal from super to pay out the loan.
Longer life for so many billions of us is an extraordinary gift. And part of a longer life is the ability to buy a home or investment property decades later than our forebears. All older Australians need is that extra factor to demonstrate how the loan will be repaid once we cease work.
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