Many young Australians are putting off settling down and buying a house. But if you get your first mortgage at 40 for the standard term of 30 years, you might be paying it off well into retirement. Here’s how to make it work for you.
Will age affect the amount you can borrow?
Technically not, since lenders cannot discriminate according to age. However, banks and brokers fall under the consumer credit code and have to ensure that the loan will not put their clients under financial hardship now or over the loan term.
Lenders need to see that you will be able to afford the repayments, so if you’re borrowing later in life they will require you to have an exit strategy.
Some questions to consider might include whether you will retire the debt when you cease working, or use your superannuation and investment income meet the repayments and provide for your retirement needs. If you can’t supply an exit strategy, lenders might reduce the loan term to 15 years. That will mean higher repayments, but also ensure the debt is paid down by retirement age.
For example, a $600K loan over 30 years at 5 per cent requires a monthly repayment of $3,221. With a 15-year loan term, the repayment increases to $4,745 per month.
Over a 30-year term, however, you might pay around $559,000 in interest, while a 15-year term reduces interest to around $253,000 - a saving of $306,000 by paying the extra $1,524 per month.
It’s all in the tailoring. If you’re signing up for a loan that will extend beyond retirement age, it’s wise to ensure you:
- Borrow within your means;
- Have a clearly-defined exit strategy;
- Can afford to make extra repayments to reduce the loan term;
- Have adequate insurance for income protection, death, illness or serious injury.
Being able to show a healthy superannuation balance and having investments in property or other asset classes will help if you’re borrowing in your 50s and 60s, as will working with a financial adviser and mortgage broker who understand your situation and know which lenders will offer suitable pricing and products.