In recent weeks we have had a number of inquiries from borrowers in their 60’s. They had been to one (or more) lender(s) and were told that they were too old to borrow against a property and were left dejected.
While it’s true that lenders baulk at lending to older borrowers, potential borrowers should not lead with their age. Let me explain. Say you are a potential borrower in your 60’s and you have passive income of say $100k p.a. (or more) and assets including property and cash well within seven figures and you wish to borrow $1m against an investment property valued at $2M. For the purposes of this exercise let’s assume rental yield of around 3.75% and weekly rental income of $1,450. Remember a lender will only use 80% of this rent for servicing calculations. It looks a little like this:
| Servicing Calculation | Actual Calculation | |
|---|---|---|
| Purchase Price | $2,000,000 | $2,000,000 |
| Deposit | $1,000,000 | $1,000,000 |
| Debt | $1,000,000 | $1,000,000 |
| LVR | 50% | 50% |
| Interest Rate | 7.80% | 4.50% |
| Term (years) | 15 | 15 |
| Monthly Repayments | $9,441.42 | $7,649.93 |
| Monthly Income | ||
| Passive Income | $8,333.33 | $8,333.33 |
| Rental Income | $5,026.67 | $6,283.33 |
| Total Income | $13,360.00 | $14,616.67 |
We assume that in this example the passive income is tax free/after tax and that stamp duty and borrowing costs are paid for by the borrower. Let’s put aside the arguments as to whether or not this is a good/bad investment. That’s not our role. Using the servicing calculator which applies a discount to the rent and increases the rate to a stressed amount, we can see that the borrower is comfortably able to service the debt. If we use the Actual Calculation using 100% of the rent and the prevailing interest rate it’s obviously a much rosier picture.
The lender will assess based on the Servicing Calculation.
This is not an unusual position for someone in their sixties as they have had a lifetime of savings and can access superannuation. If all you asked of the potential lender was “do you lend to people in their 60’s?” You shouldn’t be surprised by the answer.
However, if you opened with the financial particulars and then disclosed your age you would have a much better chance of getting the loan approved. The only difference is that lenders generally will prefer a shorter term of 15 years (and sometimes 10 years) and will insist on amortising the loan.
When we speak with mature borrowers we ask them about their income and financial assets. Sometimes, the conversation dies. Many mature borrowers are reluctant to disclose their financial position to a total stranger. That’s perfectly understandable given that when you disclose such information you are often bombarded with financial advertisement and spruikers trying to sell you any investment that will line their pockets.
However, without that information the likelihood of getting a loan is reduced to zero. I should also stress that your information is confidential – otherwise we’re at risk at losing our Australian Credit Licence authorisation.
We take care to isolate your files on our electronic systems and any printouts are shredded and disposed of securely. Our backups are stored in a dedicated drive in our office, in a cloud subscription service (this is encrypted) and where required, within our aggregator’s systems.
By law, we need to keep these files for 7- 10 years. So, if you’re a mature borrower, the next time you talk to your broker about borrowing don’t be afraid to discuss your financial position first. You can do this anonymously initially if all you want is an indication. But at some stage – should you wish to proceed – you will need to disclose your identity and the broker will need to verify all financial information (and your identity) prior to taking your application to a lender.
Sadly, this level of compliance is required to satisfy not only potential lenders but also to comply with Anti Money Laundering (AML) legislation. Failure to do so will mean the lender or broker is in breach of the relevant AML legislation.