In 2011, the National Consumer Credit Protection Act implemented changes to the responsible lending requirements and borrowers over the age of 50 are now being required to demonstrate an ‘exit strategy’ or a plan for what will happen with the loan when they retire.
Lenders are not able to approve a home loan if they believe it to be unsuitable down the track, as part of the responsible lending requirements. A loan may be deemed unsuitable if the borrower will not have the income in retirement to meet the repayments or won’t have sufficient funds to repay the loan without selling the property. This is particularly relevant for owner occupied home loans as requiring a borrower to sell their own home is not seen as a valid exit strategy. So as well as providing evidence of your income, expenses, employment, assets and liabilities, you will also need to show how you will meet your home loan repayments in retirement or pay out a home loan if your income in retirement will be minimal.
Assets that can be sold can be part of the exist strategies. Some examples include superannuation, shares or other investment properties. This can help show that there will be enough excess funds to pay out the remaining loan amount. Alternatively these assets may provide income in the form of interest, dividends or rent that can be used to add to the retirement income to meet the loan repayments.
Many Australians believe it is becoming more difficult for those over 50 to obtain a home loan due to these new requirements. So, if you are worried about being approved for a home loan or are not sure what you will need to provide, speak with the lender before handing in an application. They will be able to give you a checklist of what information you need to provide.
The exit strategy that you will need to provide will vary based on your income, assets and plans for retirement. Some examples of an exit strategy may include:
- Sale of investment property or other assets
- Income or payout from superannuation
- Downsize the property if it is realistic that this will be possible
- Investment or other income that will continue into retirement
Lenders may have slightly different requirements when it comes to applying for a home loan, however, if you cannot demonstrate a reasonable exit strategy or the ability to pay the loan into retirement, you may find it difficult to obtain a home loan.
When it comes to assessing a home loan application, lenders need to be able to see that you can meet the repayments ongoing or pay out the home loan. So, although you cannot be declined for a home loan based solely on your age, it is one factor that can affect your ability to the approved for a loan.