All debt ultimately needs an "exit strategy" which becomes a factor for mid-life and older borrowers.
Debt and 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", which is essentially the way you intend to repay the loan beyond your working life.
Similarly, if you have business borrowings, there is always a focus on the term in which your borrowing commitment will be repaid.
Mortgages and Responsible Lending
For mortgage lending, or "regulated credit", 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 enforcing professional standards in the finance industry.
A large part of NCCP discusses responsible lending practices. Therefore, 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 achieved. If you are separated and seeking to refinance a home, this adds another layer of credit hurdles.
The Retirement Age Cap
Credit providers tend to have different interpretations of the NCCP, which can mean they all assess older borrowers in different ways.
As a general rule, an acceptable retirement age varies between 65 and 75 years. If a borrower cannot provide an robust exit strategy past retirement, then the loan term cannot exceed the expected retirement age.
Older Borrowers
The purpose and security provided for the loan have 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" is not an exit strategy that is accepted by most credit providers.
This said, there are often valid reasons why debt may remain a good strategy for older borrowers, such as:
- The customer may have a better opportunity cost of funds in property than in other assets
- The debt relates to investment or business purposes and is tax-effective
- You may wish to retain property ownership within the family unit for a period of time
In many cases, a Reverse Mortgage product can be a good strategy for retired home-owners.
Changing Legal Position - ASIC Regulatory Guide 209
Perhaps due to recognising the nature of people living longer and wanting to remain in their property as long as possible, ASIC recently clarified their position on downsizing in particular, as quoted below.
"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 was 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 quite a softening of ASICs 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:
| Strategy | Description |
| Other Financial Assets | Provides Debt Cover as other financial assets of value exist that are more than the current loan limit. |
| Co-Applicant Support | Another applicant who is not within close retirement age can provide loan servicing support. |
| Downsizing | Intention to sell the home at retirement - with the ability to show a material amount of property equity. |
Commercial Lending Policy
In the commercial lending landscape, there is a real push to facilitate more "flexibility" for business owners using commercial property as security. This has seen banks and credit providers offering higher loan-to-value ratios and longer loan terms
This is an area where the regulators and government are often at odds, and in fact, this shows some contradiction in their mindset regarding the regulated environment above.
Financiers and the government will say that it gives business owners an alternative to using residential property as security for their loan, and gives more flexibility in managing their debt over a longer period.
Therefore, the age of the individual borrower/guarantor, while still relevant, becomes a less material component.
One aspect is the push for amortisation (principal repayment) at the outset of a loan. This is a positive development, as opposed to the more common system of an initial interest-only period, then short-term amortisation, which can cripple business cash flow.
Start with the End in Mind
Debt can still have a positive 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.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au