Too Old for Debt?

All mortgages need an "exit strategy".

MORTGAGES & EXIT STRATEGIES

If you are 35 years of age or older, and getting a mortgage, chances are you have been asked about your "exit strategy".

Why?

We have seen greater scrutiny of credit since The National Consumer Credit Protection Act 2009 ("NCCP") was introduced. This legislation has the objective of protecting consumers, and to enforce professional standards in the finance industry.

A large part of NCCP discusses responsible lending practices. Credit providers require evidence that a loan can be repaid without any undue hardship.

So if your loan term (say 30 years) extends past your proposed retirement age, then your credit provider must make reasonable enquiries to determine how this commitment will be made.

The Retirement Age

Credit providers all have different interpretations of NCCP, this can mean they assess older borrowers in different ways.

As a general rule, an acceptable retirement age varies between 65 and up to 75 years. As a rule, if no exit strategy is provided, then the loan term cannot exceed the expected retirement age.

Older Borrowers

The purpose and security provided for the loan has a large bearing on credit appetite. If an owner occupied property (as opposed to an investment property) is the security for the mortgage, a clear exit strategy will be expected.  "Downsizing" has not been an exit strategy that is accepted by most credit providers.

This said, there are often valid reasons why debt may remain a good strategy such as:

- With Interest Rates so low, the customer may have a better opportunity cost of funds rather than paying off debt;
- The debt relates to investment or business purposes and is tax effective;
- You may wish retain property ownership within the family unit for a period of time.

Legal Update - ASIC Regulatory Guide 209

Perhaps recognising the nature of people living longer and wanting to stay in their property, ASIC recently clarified their position on downsizing in particular:

"In most cases, consumers should be able to meet their payment obligations under a credit product from income rather than equity in an asset. However, there may be circumstances where this is not a reasonable position, or the sale or other use of an asset to meet repayments may be anticipated by the consumer, and form part of their strategy for meeting their financial obligations under the new credit product."

This position was supported by a case study where a 55 year old planning to retire and downsize her home at 65, "at the point that she can no longer comfortably afford repayments, intends to sell the home and downsize". Further, "If her likely equity position will be such that she can readily pay the outstanding balance of the loan at the time of the planned sale, it is reasonable to assess the loan as ‘not unsuitable'."

This is a softening of the previous interpretation.

Bank Interpretation

Credit policy is becoming increasingly structured in relation to retirement strategy. With the objective of providing greater transparency to borrowers there are three acceptable strategies for exiting debt:

Mitigant Description
Other Financial Assets "Debt Cover".  Other financial assets exist that are more than the current loan limit.
Co-Applicant Support Another applicant who is not within close retirement age who can provide loan servicing support.
Downsizing Intention to sell the home at retirement - showing a material amount of property equity.

 

Summary

Debt can still have a role as we get older. Like all financial strategies, start with the end in mind.  Have a clear plan of where you want to go and use debt to your advantage.

E: resfinanceteam@mcpgroup.com.au
P: (03) 9620 2001
W: www.mcpfinancial.com.au

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