You may outlive your money, but you’ll never outlive your mortgage.

By Catherine Lezer

There is a big focus on life expectancy, retirement age, and rightly so. Most sensible people are thinking about ways to keep money coming in after they stop work. Investment property, shares, super and pensions feature prominently in any discussion about retirement. Some are planning to work as long as possible because they know they won’t have enough for a long retirement. A few clever people will even have a more money than they will need and are planning to leave a legacy. Your accountant, your financial planner, the government and a plethora of experts are ready willing and able to help you plan for retirement.  

But I bet you didn’t know your home loan bank is planning for your retirement too.  “Responsible Lending” laws introduced in 2012 has focused the banks on this very topic.  
One interpretation some banks take of these new laws is to enforce age restrictions on mortgages. This is mortgages on owner occupied property, not on investment property.  
In a nutshell, these lenders won’t let you have an owner occupied mortgage beyond the age of 65, as they have chosen 65 as the practical age for retirement for most people.
Prior to last year it was  common practice for banks to allow a 25 or 30 year term on mortgages.  But with these new restrictions your owner occupied mortgage must be paid off by the time the borrower turns 65.
This is fine if you are taking out a home loan in your 20’s or 30’s. But wait until you are in your 40’s or beyond, and the loan term will be shortened, sometimes greatly shortened.  I am sure you can do the maths, but to state the obvious, if you wait until you are 45, the maximum loan term will be 20 years; wait until 50, the maximum loan term reduces to 15 years.
Lets make this real with a principal and interest repayment example.  I will use Australia’s average home loan is approximately $300,000 (Source: ABS Housing Finance 5609.0 December 2012, Table 5609.010c), and the current standard variable rate of 6.2%pa in the calculations.
30 year term Approx.  Repayment $1838 per month
25 year term Approx. Repayment $1970 per month
20 year term     Approx. Repayment $2185 per month
15 year term Approx. Repayment $2565 per month
10 year term Approx. Repayment $3360 per month

The good news: a shorter loan term means the loan is paid off quicker (and the bank earns less interest). The bad news: a higher repayment means a smaller loan.

As a mortgage broker, I see these new policies are already impacting clients.  Not so much the first home owners, but it is impacting people buying their second (bigger) homes in their 40’s. These clients are often upgrading due to needing more room after kids come along. All the same time these clients have more mouths to feed, they often lose an income for a period of time, and on top of this must make higher repayments because of a reduced loan term.  Not fun.
But perhaps the biggest impacts are on clients who are divorcing. Often aged 45 to 55, a divorcee’s income and financial position often drops substantially, and just as they are ready to jump into a new home they find their loan term is shortened, the repayment is high and hence what they can borrow is much less than they were hoping. Disheartening to say the least.
But let us not get gloomy for too long, there is something you can do if you know these laws will impact you: get a great mortgage broker. Do not expect to turn up to your bank and for them to make an exception for you. Policy is policy since the GFC. As I said above not all banks have this policy, and a good mortgage broker will be able to point you in the right direction of a bank to suit your situation. 

Property is Catherine Lezer’s passion. She owns nine properties of her own and has a fundamental understanding of how the property market works. 

“I’ve bought some great properties and some ‘bad’ properties, and even the bad ones have made me money,” says Catherine. “Property is the most reliable way to make money that I know!”
“I’ve purchased, sold, tendered, offered, negotiated, won and lost at auction, developed and renovated so I understand what happens out there in the market,” she adds. “Being able to help other people finance property is an added bonus for me.”
Originally from Perth and now based in Sydney, Catherine joined Smartline in 1999 with over 25 years of banking experience and qualifications include a Bachelor of Business and an MBA. Catherine has helped hundreds of clients finance houses, semis, terraces and apartments, with the majority of her business coming from word of mouth referrals.