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Can you get a home loan on a pension?
Getting a home loan while receiving a pension may be difficult, as lenders need to ensure you have the ability to repay the loan without putting yourself in financial difficulty. Lenders in Australia are bound by responsible lending laws, meaning they must ensure they don’t offer you a financial product that’s unsuitable for you and your financial situation.
It’s up to each individual bank or lender to determine how it assesses this, and you may need to jump through a few more hoops than a typical borrower if your only income stream comes from a pension.
As a typical home loan is usually repaid over a span of 25 to 30 years, many lenders will also want to establish what’s known as an exit strategy for older borrowers. This is an agreed plan on how you intend to pay off any loan should you run into any difficulty in the future. Lenders generally want to see a loan repaid by the time you reach the age of 75.
Is a pension considered a form of income for a home loan?
A pension may be accepted as a form of income if it’s ongoing and won’t stop if your personal circumstances change. Pensions like the age or disability support pension may be an acceptable form of income, whereas other government payments like Jobseeker and Austudy aren’t.
What type of home loans are there for pensioners?
While lenders don’t offer specific ‘pensioner home loans’, there are a number of home loans you may be able to apply for as a pensioner. They include:
Variable rate home loans
A variable rate home loan is one where the interest rate can change at any time, and therefore the amount of your regular loan repayment can also change. Depending on the size of the loan, even a small change to your interest rate can cause a significant change in your repayments.
It’s important to note that any increase in pension payments that reflects changes to living costs only happens twice a year (in March and September), and changes to your pension won’t necessarily correlate to interest rate rises.
Fixed rate home loans
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. This means the rate of interest you pay will stay the same for this period. Fixed rate home loans are not vulnerable to changes to the RBA’s cash rate in the same way as variable rate ones.
A fixed rate home loan can provide a degree of certainty, as you’ll generally have a better idea of how much you’ll need for each 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 fixed rate period.
Be mindful though, if interest rates rise, you may see a significant jump in the amount of your regular repayments once any fixed rate period ends. Should interest rates go down during your fixed term, you may end up paying more in interest than a similar variable rate loan.
Can I receive a home loan if I am on a disability pension?
Lenders generally view a disability pension as a form of income, so you may be eligible for a home loan. Your application will still be assessed based on how much money you want to borrow, how much income your pension provides, and your ability to repay the loan, so approval is not guaranteed. 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, such as the Parenting Payment, which provides income support if you’re a young child’s main carer.
Some lenders will consider Centrelink payments as part of your income when assessing your ability to repay a loan, but approval is not guaranteed, and you’ll still need to show that you have the ability to repay the loan.
You may also consider government initiatives like the 5% Deposit Scheme, which assists eligible Australians with buying a house. While most Australians on the scheme can buy a house with a 5% deposit, eligible single parents and legal guardians of one or more dependent children could buy a property with a deposit as little as 2%, while also avoiding Lenders Mortgage Insurance (LMI).
How can pensioners unlock value in their homes?
If you own your home outright or have mostly paid it off and you want to turn some of this equity into cash, there are a number of options available.
Home Equity Access Scheme
The Home Equity Access Scheme allows eligible pensioners to apply for a non-taxable loan from the Australian Government. You need to be of Age Pension age or older, be eligible for a qualifying pension, and 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 have, and is paid fortnightly. You may also be able to get an advance payment as a lump sum.
You must repay the loan and any associated costs, but the loan’s interest rate is usually lower than a traditional home loan. Check with Services Australia to see if you’re eligible to apply and if so, how much you may be able to borrow.
Reverse mortgages
A reverse mortgage is when a financial institution lends you a portion of the value of the equity you have built up in your home, using your property as a security. These mortgages are reserved for those aged 60 years and older. Unlike a standard home loan, there are no scheduled repayments required, with the interest charges being added to the balance of the loan.
The loan is typically repaid when you either:
- Sell your house
- Move into aged care
- Pass away
The amount of money you can borrow depends on the equity you have in your property and your age.
There are risks with a reverse mortgage, as the interest rate is likely to be higher than a standard home loan, and the interest charged 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.
Line of credit home loans
Line of credit home loans can allow you to withdraw funds up to a credit limit approved by your lender, based on the equity in your home. 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 you’ve 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.
It’s important to shop around to see what different types of finance options may be available to you, and what interest rates, fees, and other costs may apply. Carefully read the Target Market Determination (TMD) and Key Facts Sheet for any loan product you’re considering. It may also be wise to obtain suitably qualified financial advice before proceeding.
