Money
Want to refinance but over 50? Here’s how you still can
Yes, you can still refinance, or even first-time finance, after 50, says Nicole Pedersen-McKinnon. You just need to be able to show them the money and have a good exit strategy.
By Nicole Pedersen-McKinnon
Do you want to know the secret to paying down your mortgage faster? A lower interest rate.
And that should, courtesy of the Reserve Bank, be what is happily coming at you soon.
But it’s within your power to both bring rate cuts forward and to boost them… and potentially save yourself a fortune in extra interest .
Exactly how much?
Well, let’s say you have a $400,000, 25-year home loan and you’re on a pretty average rate for a big bank of 7% – you’re tracking to pay $448,148 in interest over the term of your loan.
However, if you cleverly play the (hoped for) downward interest rate cycle, and renegotiate or refinance to a rate that will swiftly fall to 5%, your interest bill will drop to $301,509 – so you’ll save $146,639 in interest. (Already, today, there are quality loans out there for less than 6% – take a look around.)
But that’s just from the decrease in your minimum monthly repayment.
From there you can take your savings stratospheric and slash your interest bill by a further $96,073 (to just $205,436)… by simply keeping your repayments the same.
You’ll also be mortgage-free more than seven years early.
I explain more about my "up stumps but still stump up" technique, to save that average $242,712 in interest, here.
The fly in the refinance ointment
But now that I have your attention, to get a new loan over the line after the age of 50, you need serious strategy.
After all, if you’re around 10 years from retirement, a 25- or 30-year repayment schedule might not be that appealing to a lender.
You need to make it so.
I sat down with over-50s refinancing expert Justin Thom, from Map Home Loans. He says these are your 2 strategic options… in mortgage/movie parlance.
Strategy 1: Show them the money
(Just like Cuba Gooding Junior in Jerry Maguire)
See if you can show a lender you can cover the loan repayments into retirement, whether from investments, shares, super, and/or rental income.
This should be acceptable to a lender.
“You'd just need to show there is enough income to support the repayments plus your lifestyle and any other debt repayments,” Mr Thom says.
ASFA currently calculates a couple needs about $73,337, and a single $52,085, to live a comfortable life in retirement (at June quarter 2024).
But that’s without home loan (or rental) repayments, so you’d need an appropriate margin over that.
If that’s looking unlikely however…
Strategy 2: You need an exit
(Just like Keanu Reeves in the Matrix)
If you won’t have sufficient income after retirement to cover your expenses including loan repayments, you’ll need to come up with an exit strategy.
“You need to be able to explain to the lender how you intend to repay the loan before retiring, assuming retirement will likely occur prior to the end of your requested loan term,” Mr Thom says.
Getting back to that example of a 30-year loan term at the age of 50, how do you intend to repay it prior to turning 67 (assuming this is your expected retirement age)?
Note that the maximum retirement age any lender will consider for this metric is 70.
Mr Thom says 3 common exit strategies are:
- Use your super
Use super to repay the remaining loan balance in full when you retire (and see my analysis here of why this could in fact work out better).
- Sell other assets
Sell assets such as shares or other property to clear your debt.
- Downsize
You can show the lender how you plan to sell your home and purchase something cheaper.
For example, you might intend to downsize to a unit from a house. Don’t miss that when you do so, there’s a relatively new opportunity to contribute up to $300,000 into superannuation. This is on top of the existing non-concessional contributions allowance of $120,000 per year. And both members of a couple can do this for a potential $660,000 extra in your super, each, if your house profit supported it.
Find out more about the downsizer bonus here.
How it all fits together
“So, typically, we would have a discussion with our client about what their plan is. If it's using super, the lender would then calculate how much super the clients expect to have at retirement age based on employer contributions until that point, compare this to the expected remaining loan amount at the same point, then deduct the remaining loan amount from the expected super balance,” Mr Thom says.
“If there's still enough super there to retire on then it’s usually fine.”
Whichever strategy you pursue, everyone of every age needs to do these next 2 things before applying for a mortgage…
Preen for your ‘selfie’ and prune your spend
There are two further hurdles you always need to jump to get a loan approved.
1. Ensure your credit score is good enough
Don’t make a mortgage move until you have pulled your credit report and score from one of Australia’s 3 main credit bureaux:
From any of these 3, you are able to access your credit report free of charge every 3 months. It’s one of the most important ‘selfie’ checks you’ll ever do.
You need to make sure your file is squeaky clean and therefore your score designated ‘good’ or above.
A prospective lender will look first thing so check first, in particular, that there are no mistakes on your report. If you find any (for example, an reported unpaid bill you can prove you paid) you should be able to (probably slowly) correct these with the company and bureau.
Of course, you’ll need to be a model money citizen in the lead up to making any loan application. Speaking of which, you also need to ensure:
2. Your expenses are low enough
A lender will go through your finances with a fine-toothed comb to make sure your outgoings are as low as possible. Or, more accurately, to confirm there is enough clear space between your income and your expenses to afford the new loan repayments.
The so-called ‘Netflix test’ will look particularly at your discretionary spend. So cut the subscriptions and maybe dinners out in advance of applying (on the downlow, insiders whisper: ‘Use cash for pub nights!’). The prior 3 months should be enough economising time… just get a little frugal in the name of a big-saving refinance!
But realise in all this that there is one huge factor, finally, on your side…
The mortgage stress test will get less stressful
There’s an argument between lending institutions about how relevant it still is – and different policies now between them – but lower rates usually mean more loan-test leeway.
The mortgage stress test – part of what’s known as a loan serviceability assessment – officially requires you to be able to cope with 300 basis points of interest rate rises.
As rates fall, this bar and barrier to a new loan (even if your old loan has become way more expensive), will fall.
You should soon be much more likely to be approved. And that’s even – provided your credit score is still looking good – if you have been declined before.
Remember, if your loan is $400,000, a potential saving of $242,712 could await… and mortgage-freedom a full 7 years earlier.
Feature image: iStock/andresr
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
This article reflects the opinions and experiences of the author and does not necessarily reflect the views of Citro. It contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
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