As a pensioner, age could be a significant factor in how lenders assess your loan application. It’s possible, for instance, that banks may want to know exactly how you plan to repay a home loan with what’s known as an exit strategy, whether or not you will have a continuing source of income in your retirement and what assets you could potentially sell to help repay the loan if needed.
Let’s consider some of the options that may be available to prospective pensioner buyers in more detail.
Can a pensioner get a home loan?
There are a number of home loan products out there for pensioners looking to buy a new home or refinance, but depending on your circumstances, you may have to look beyond the traditional lenders. Pensioner home loans offered by non-traditional lenders come in a variety of different product types, but bear in mind that getting approved for a home loan as a pensioner could be considerably more difficult than the usual process, particularly if you are relying on the pension as your main or only source of income.
A borrower who receives a pension may also find their lender charges them a higher interest rate or doesn’t let them borrow as much as other types of borrowers, due to the higher expected lending risk.
Some lenders may view pensioners as a higher-risk borrower due to the fact that the pension is typically lower than the income level required for a home loan.
A pensioner’s age may also prevent them from getting approved for a home loan, as traditional home loan terms tend to be either 25 or 30 years, and a lender may determine that there is a high risk of the borrower passing away before the loan can be repaid.
With these factors in mind, pensioners who are interested in taking out a home loan may want to consider their options carefully, including whether seeking a shorter loan term or smaller loan amount could improve their chances of approval.
Types of home loans for pensioners
There are a number of different home loan types that may be available to pensioners looking for a home loan. These include:
- Reverse mortgages
- Line of credit home loans
- Variable rate pensioner home loans
- Fixed rate pensioner home loans
- Pension Loans Scheme
1. Reverse mortgages
A common form of home borrowing for pensioners and retirees is a reverse mortgage. A reverse mortgage is a type of home loan where the bank lends you a portion of the value of your home, using the house as security. Reverse mortgages in Australia are reserved for those aged 60 years and older, and unlike a standard home loan, there are no scheduled required repayments. In a reverse mortgage, the interest repayments are added to the balance of the loan, and the loan is typically only repaid when you either:
- Sell the house
- Move into aged care
- Pass away
The amount of money that you can borrow through a reverse mortgage depends on the equity you have in your property and can also vary as you age. For instance, regulator ASIC’s Moneysmart website explains that the most you can borrow is likely to be around 15% to 20% of your home’s value if you’re 60 years old, or 20% to 25% if you’re 65.
Bear in mind that as Moneysmart warns, there can also be some risk and “a long-term financial impact” associated with reverse mortgage products, so it could be worth seeking independent legal or financial advice before you proceed.
2. Line of credit home loans
Another option available to pensioners is a line of credit home loan. A line of credit home loan uses the equity in your home to allow you to withdraw funds at a time of your choosing, based on an approved credit limit. The amount approved by your financial institution can be drawn down either all at once or spread out over time, making it a flexible financing option. You generally only need to pay interest on the amount of money you have drawn down at any given time, although bear in mind that these types of loans can also come with some disadvantages, such as potentially higher interest rates than typical principal and interest home loans.
3. Variable rate pensioner home loans
Variable rate home loans are a type of home loan where your lender can change your interest rate over time, and therefore the monthly loan repayments you pay can change in amount.
Even a seemingly small change to your interest rate can cause you to pay significantly more or less per month, although the current low-rate environment in Australia means some borrowers may be able to obtain lower variable interest rates than in the past.
Most variable rate home loans aren’t designed specifically for pensioners, and a pensioner may struggle to afford their repayments if interest rates rise, since a pension is a fixed source of income which won’t necessarily go up at the same time or speed as interest rates. For example, Services Australia explains that pension rates are regularly reviewed and adjusted based on the Consumer Price Index (CPI), but Moneysmart notes that lenders can change their variable home loan rates as the lending market changes.
4. Fixed rate pensioner home loans
A fixed rate home loan is a type of home loan that allows the borrower to lock in an interest rate for a set period of time, generally from one to five years.
The interest rate the borrower pays will stay the same for this period of time. Fixed rates are generally not as heavily influenced by changes to the RBA cash rate as variable rates, though fixed rates have also dropped considerably over recent months. More specifically, Canstar research shows that so far this year the average interest rate for a two-year fixed loan has dropped 0.68 percentage points, from an average of 3.13% in January to 2.47% in September 2020. Five-year fixed loans have dropped 0.52 percentage points, from an average of 3.47% in January to 2.97% in September. These figures are based on owner-occupier loans on Canstar’s database available for $400,000, 80% LVR and principal and interest repayments.
A fixed rate home loan can provide a certain degree of cash flow certainty, as you know exactly how much you’ll need to pay every month over the fixed rate term. However, if variable interest rates go down during your fixed term, you may end up paying more than you need to in interest.
→ Related article: Is now a good time to lock in your rate?
5. Pension Loans Scheme
Another option for Australians on an Age Pension who are looking for alternatives to a home loan from a private lender may be the Pension Loans Scheme. The scheme allows older Australians to receive a non-taxable loan from the Australian Government. The loan amount can be up to 1.5 times the maximum payment rate of your eligible pension, depending on your age and how much equity you own, and is paid fortnightly.
To be eligible, you or your partner must be Age Pension age and either receive or are eligible to receive a qualifying pension. You must also:
- own real estate in Australia that can be used as security for the loan
- have adequate and appropriate insurance which covers the real estate offered as security
- not be bankrupt or subject to a personal insolvency agreement
Can I get a home loan on a disability pension?
Generally speaking, most lenders will view a disability pension as a genuine form of income, meaning that approval for a home loan may be based on factors such as how much income your pension provides, your ability to repay the loan and the lender you choose, as well as how much money you want to borrow. Potential borrowers with a disability pension may need to provide proof of income and assets among other things, similar to any other home loan application.
Most lenders will also allow you to apply for a home loan if you receive the following types of veteran’s pension payments:
- The Department of Veterans’ Affairs Service Pension
- The Department of Veterans’ Affairs War Widow(er)’s Pension
- Department of Veterans’ Affairs Age Pension
- The Department of Veterans’ Affairs Incapacity Pension
Before taking out or applying for a home loan as a pensioner, it could be worthwhile obtaining professional financial advice from someone who can help you work towards your goal of home ownership or property investment in a realistic and achievable way.
Original author: William Jolly
This article was reviewed by our Senior Finance Journalist Ellie McLachlan and Sub-editor Tom Letts and before it was published, as part of our fact-checking process.
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