Home loans for pensioners: Can a pensioner get a home loan?

An elderly couple moving in to their new home. Image: NDAB Creativity/Shutterstock.com

If you’re retired and living on a pension you might think you’d be unlikely to qualify for a home loan. But there are options that may be available, including some help from the Australian government.

Key points:

You may be able to get a home loan as a pensioner
Any lender will want to know your ability to service or repay any loan
Lenders generally want to see a loan repaid by the time a person reaches 75.

As a pensioner, there could be many reasons why you want to take out a home loan.

You may want a loan to move to a new home that’s more suitable, you may want a second home or an investment property, or you may need a loan to set up a new home for you or your partner if there’s a divorce or separation.

Darren Moffatt, CEO of Seniors First, a mortgage broker firm specialising in servicing clients aged 60 and over, told Canstar that some people start exploring a home loan after coming into some money later in life.

“Sometimes when an elderly parent dies and leaves an inheritance to someone in their 60s or 70s, it’s the first time that person has ever had enough ‘deposit’ to buy a home,” Mr Moffatt said.

Whatever the need, any lender will want to know your ability to service or repay any loan. As a pensioner, that means you’ll likely have to jump through a few more hoops than a younger borrower.

The Australian Securities and Investments Commission (ASIC) says any credit provider is bound by regulations to make sure they only engage in responsible lending. That means they must make sure they don’t enter any contract with you that’s considered “unsuitable for the consumer”.

It’s up to each individual bank or other lender to determine how it will assess your financial situation, and decide whether it’s prepared to offer you a home loan.

As a pensioner, do I need an exit strategy for a home loan?

Given a typical home loan is usually to be repaid over a lengthy time frame, say 25 to 30 years, many lenders will want to establish what’s known as an exit strategy. It’s an agreed plan on how you might intend to pay off any loan should you run into any difficulty.

Mr Moffatt told Canstar that lenders generally want to see a loan repaid by the time a person reaches 75.

“That means the minimum repayments become much higher and the loan can be harder to get approved, in case they can then no longer service the loan on their income,” he said.

“An exit strategy can get around this. For example, if the borrower can show they have other assets – property, super – which can be used to pay out the home loan at any time in future then the lender will be more likely to agree to a 25 to 30 year loan term.”

That would help reduce your regular loan repayments.

What type of home loans are there for pensioners?

There are a number of different types of home loans for pensioners that you may be able to apply for. They could include a:

reverse mortgage
line of credit home loan
variable rate home loan
fixed rate home loan
Home Equity Access Scheme

You should also shop around to see what different types of loans may be available to you, and what interest rates, fees and other costs they may charge. Read carefully any Target Market Determination (TMD) and Key Facts Sheet (KFS). You may also consider obtaining suitably qualified financial advice.

A reverse mortgage is where a bank lends you a portion of the value of your home and then uses your property 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 repayments required. With 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
die.

The amount of money you can borrow through a reverse mortgage depends on the equity you have in your property, and your age.

For example, the federal government’s Moneysmart website says the most you can borrow if you’re aged 60 is likely to be around 15% to 20% of the value of your home, increasing by 1% for each year over 60. So if you’re 65 that could be between 20% to 25% of the value of your home.

There are risks with a reverse mortgage as Moneysmart warns the interest rate is likely to be higher than on a standard home loan. The interest charged on the loan also compounds over time, which means the amount you owe may get bigger.

Any reverse mortgage taken out since 18 September 2012 should have negative equity protection, which means you can’t end up owing more than your home is worth.

Seniors First’s Darren Moffatt told Canstar that a reverse mortgage may help some people who’d divorced or separated later in life, but it’s important to be aware of the risks that applied.

“Often the ex-spouses will receive half the sale proceeds of the family home in the divorce settlement,” he said.

If that person is on a pension and seeks a standard home loan to help buy a smaller home, Mr Moffatt said they may be declined if they’re deemed to have insufficient income to service the loan.

“Sometimes a reverse mortgage can be used in these cases to ‘bridge the gap’ on the new home purchase,” he said.

For example, say an older couple divorce and split their $800,000 home so each gets $400,000. If either wants to buy a home, they may be able to use their $400,000 towards a $500,000 property. If eligible, they can get a $100,000 reverse mortgage based on that being about 20% of the value of the new home. Seek professional advice before entering into any financial arrangements.

A line of credit home loan uses the equity in your home to allow you to withdraw funds, based on a credit limit approved by your bank or lender. The money can be drawn 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, not the full credit limit.

These types of loans can come with some disadvantages, such as potentially higher interest rates than typical principal and interest home loans.

→ Related article: What is a home loan redraw facility?

A variable rate home loan is where your lender can change your interest rate at any time, and therefore the amount of your regular loan repayment can change along with this.

Depending on the size of the loan, even a small change to your interest rate can cause you to pay significantly more or less in repayments.

Most variable rate home loans aren’t specifically designed for pensioners who receive all or part of the Age Pension from the federal government.

Any increase in the pension payments to reflect changes to living costs only happens twice a year – in March and September – so any money you get won’t necessarily increase at the same time as any loan repayment increase due to interest rate rises, which could happen more frequently if the Reserve Bank of Australia (RBA) increases the cash rate at its monthly board meetings.

A fixed rate home loan allows you to lock in an interest rate for a set period of time, generally from one to five years. That means the interest rate you pay will stay the same for this period.

Fixed rate home loans are generally not as heavily influenced by changes to the RBA cash rate as variable rate loans.

A fixed rate home loan can provide a degree of cash flow certainty, as you know exactly how much you’ll need for each regular repayment over the fixed rate term.

At the end of that set period you may be able to move to a variable rate home loan, or negotiate a new set period at a new fixed rate.

Be mindful though, that as the variable interest rates rise, you may see a significant jump in the amount you may have to pay in regular loan repayments once any set period expires. Should variable interest rates go down during your fixed term, you may end up paying more than you need to in interest.

The Home Equity Access Scheme (the former Pension Loans Scheme) allows you as an eligible pensioner to apply for a non-taxable loan from the Australian Government. You need to be of Age Pension age or older and eligible for a qualifying pension. You also need to own real estate that can act as security against the loan.

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 paid fortnightly although you may be able to get an advance payment as a lump sum.

You must repay the loan and any associated costs but the loan is usually offered at a lower rate than a traditional home loan.

Check with Services Australia to see if you may be eligible to apply and if so, how much you may be able to borrow.

Can I receive a home loan if I am on a disability pension?

Most lenders will generally view a disability pension as a form of income. That means approval for a home loan may be based on the usual factors such as how much money you want to borrow, how much income your pension provides and your ability to repay the loan.

You may need to provide proof of income and assets among other things, similar to any other home loan application.

Can I get a home loan on a single parent pension?

If you’re a single parent you may be eligible for certain government payments, sometimes referred to as a single parent pension.

Whether you can get a home loan will depend on whether you can convince a potential lender that you will be able to repay, or service that loan. Some lenders will consider Centrelink payments as part of your income.

Before making any decision on a home loan you’d be wise to seek some independent financial advice.

Original contributions by William Jolly and Eliza Parry-Okeden

Cover image source: NDAB Creativity/Shutterstock.com

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This article was reviewed by our Deputy Editor, Canstar Amanda Horswill before it was updated, as part of our fact-checking process.

Michael Lund

Former Senior Finance Journalist

Michael is an award-winning journalist with more than three decades of experience. As a senior finance journalist at Canstar, Michael's written more than 100 articles covering superannuation, savings, wealth, life insurance and home loans. His work's been referenced by a number of other finance publications, including Yahoo Finance and The Motley Fool.

Michael's worked as a reporter and producer for the BBC and ABC, including for Australian Story. He's also worked as a feature writer for The Courier-Mail and as a science and technology editor and commissioning editor at The Conversation.

Michael's professional awards include a Queensland Media Award and a highly commended in the Walkleys. In 2021 he was part of a team that was a finalist in the Australian Museum Eureka Prize for Science Journalism. He holds a Bachelor of Science in mathematics and applied physics (Manchester Metropolitan University) and a Masters of Science in pure mathematics (Liverpool University).

You can connect with Michael on LinkedIn.

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