More and more Aussies are carrying home loan debt into retirement these days. Recent research from REST Industry Super, found that 1 in 5 Aussies in their 30s and 40s are now expecting to retire with a mortgage. And with an ageing population and property prices as high as they are, the problem will likely get worse before it gets better.
This makes me think that banks will have to begin shifting their policies to accommodate these older borrowers sooner rather than later.
Retirees now need to plan not only to live on their pension, but to cover mortgage repayments as well. But one of the major problems is that because a pension is not accepted as primary income by most lenders, many seniors aren’t able to refinance their home loan to a better deal, and are stuck making high repayments well into retirement.
So what can the banks do? There are a few options to make a lingering home loan more manageable for older Aussies.
Pension-friendly application criteria
Perhaps the most obvious solution is to open up lending criteria to make it easier for pensioners to refinance small, existing loans.
Banks would have to proceed with caution to be sure borrowers can still meet repayments after retiring – but many pensioners are very careful with their money and probably could afford to service an affordable loan. This is particularly true of self-funded retirees or those who are still working part-time and receiving a part-pension.
If, between savings and a pension, retirees are able to meet repayments comfortably, opening up lending criteria may be a good solution for borrowers and banks alike.
Another option may be to make reverse mortgages more common. A reverse mortgage depends on a lot of equity and a small principal, and means the borrower makes no repayments – perfect for retirees who have already cleared the lionshare of an existing loan.
With a reverse mortgage, interest is added to the loan amount and then repaid all at once after a borrower passes away, instead of being gradually paid off. While this makes it a more expensive option, it would allow pensioners to use their savings to fund their retirement, without worrying about meeting high loan repayments.
Partial reverse mortgage
For retirees with considerable savings built up, or those still working part-time and receiving a part-pension, a partial reverse mortgage may be a more cost-effective solution. Unlike a full reverse mortgage, this isn’t something that exists at the moment, but I could see it working in much the same way as a full reverse mortgage, except borrowers would make repayments that they nominate and that are affordable for them. That means that while pensioners will continue to chip away at debt, it won’t negatively impact their living budget.
Already popular in Europe, generational mortgages may become big news in Australia as well. What it means, is that when an older borrower passes away, their kids can take over and continue paying off the family home.
Especially with property prices as high as they are, this could be a solution not only for pensioners, but also for their kids who might be struggling to enter the market on their own. It can benefit the banks as well – rather than a mortgage that doesn’t get paid off after an older borrower dies, it’s passed onto younger relatives who can continue to make repayments.
Remember that if this is offered as a solution, whoever takes over the loan will need to reapply to the bank, who will reassess and decide if they will allow the mortgage to continue.
What to do before you retire
Changes to the way banks handle older Australians’ mortgages may be some time coming, so if you’re retiring soon, there are a few things you can do to prepare and make sure you’ll still be able to meet mortgage repayments as comfortably as possible.
- Refinance your home loan. How long has it been since you compared your mortgage rate to others in the market? Before you retire, shop around for a better deal and refinance your loan. Banks aren’t allowed to discriminate on the grounds that you’re old enough to retire soon, so you can still apply for a new loan as long as you have a good income source.
- Pay off your principal. If you’ve got another 5-10 years of work, use that time to pay off as much of your loan as possible. The less debt you have left in retirement the better.
- Save as much as possible. Do you have enough saved up in super to live comfortably and service a loan? Start working out your budget now, and if things are looking tight, start thinking about how you can start saving more. This might mean cutting costs in your day-to-day life, or making investments like a high rate term deposit.
- Consider downsizing. When you retire, trading in your larger family home for a small apartment may be a smart move. In the current property market, you’re likely to get a decent price for your house, and choosing a smaller, easy to maintain apartment instead can take a lot of strain off your budget.