Why you can be too old to qualify for a mortgage
Banks are wary of older first-time borrowers - unless they want finance for an investment property
First home buyers Sarah and Michael (not their real names) were unable to secure a home loan but had no problems getting an investment loan. Can you guess why?
Apparently their age had something to do with it. While banks cannot specifically be "ageist" in a lending scenario, they do take into account the suitability of a loan to the individual, especially around their serviceability.
"A client needs to be able to establish how they will meet mortgage repayments and/or articulate an exit strategy if they are nearer to a retirement," says Michael Saliba, a Smartline mortgage broker.
When Sarah and Michael applied for their first home loan she was 39 and he was 55. A 30-year mortgage would have seen Michael still paying off his first home loan in his 80s.
As a general rule, investment loans don't need an exit strategy, as you can sell an investment property when you retire and it doesn't affect your home.
Under the National Consumer Credit Protection Act, you're considered to be in financial hardship if you can't pay off a mortgage without selling your home. On the other hand, you can sell an investment at any time without financial hardship.
This may explain why Sarah and Michael were approved for an investment loan over a home loan.
"Responsible lending requirements mean lenders require borrowers over 50 years old to demonstrate how they will be able to afford their loan repayments in retirement - what is called an exit strategy," says Steve Jovcevski, Mozo's property expert.
"For borrowers who take out an owner-occupied home loan, selling the property is not considered by lenders as a valid exit strategy."
The typical first home buyer is no longer in their 20s, or early 30s for that matter.
Figures from ING show the average age of first home ownership has jumped dramatically in the past decade, from 34.7 in 2005 to 37.7 in 2015. In Sydney it's 38.2.
The decline in home loan affordability, along with lending policy changes that require larger deposits, could see exit strategies become more commonplace.
Downsizing to a smaller home when you reach retirement is one way around the issue but as Otto Dargan, managing director at Home Loan Experts, says it's not accepted by all lenders.
Other exit strategies include the sale of assets such as an investment property or shares or lump sum repayments from super and or ongoing income from super.
"Some lenders will allow a conservative projection using the growth of your superannuation," says Dargan.
Jovcevski adds that you can improve your chances of getting a loan by having a bigger deposit.
"It goes without saying that the bigger the deposit, the more comfortable a bank will be lending to you. Being able to demonstrate proof of genuine savings, a stable employment history and regular financial discipline when it comes to your expenses will go a long way towards strengthening your borrowing muscle in the tightened lending landscape."
The introduction of comprehensive credit reporting also works in favour of age, as older borrowers tend to have a long credit history. So as long as you've paid your debts in full and on time, it should increase your borrowing power.
Lending through the ages
Different banks have different policies for borrowers who are nearing the age of retirement.
- 35: Lenders will consider your profession and likely retirement age and they may shorten your loan term.
- 45: You may be required to show superannuation statements or demonstrate that you have an exit strategy in place to repay the loan when you retire.
- 50: Most lenders will allow you to borrow but some may decline your application due to your age.
- 55: Almost all lenders will require a written exit strategy, evidence of your superannuation and other assets that can be sold to repay the proposed debt.
- 60: Most banks are likely to decline your application due to your age. However, if you've got a continuing source of income past retirement, or have assets you can sell to help repay the loan, then your loan may be approved.
- 65/75/80: You'll only be able to borrow money with either a senior's equity loan (reverse mortgage) or with a standard loan if you can prove an ongoing post-retirement income.
Source: Home Loan Experts