Banks and many lenders will offer you a pensioner home loan if you’re retired and receiving pension income or, for that matter, even a disability pension.
So while it may be a bit more challenging, it is certainly possible.
If you’re looking to purchase a new home or refinance an existing home loan, here are a few essential considerations before applying for a home loan.
Do Banks Give Loans to Pensioners?
Yes, if you’re a pensioner, you can still expect to find suitable home loan products, from standard loans to specialist loans.
Nonetheless, different lenders’ eligibility criteria vary. For example, some lenders may treat your pension as a form of income when assessing your loan application and borrowing power.
Generally speaking, it all boils down to the lender and your personal circumstances. The latter includes your savings, extra income stream, i.e. rental income from your investment property, whether or not you have any outstanding debts, the extent of your debts, and the amount you intend to borrow.
With lenders considering loans for pensioners at as high risk, these are some challenges you may have to navigate, especially if your age pension is your only income source:
- Borrowing limits: Applying for a home loan at an older age may restrict the loan amount you can borrow as lenders will consider you a high-risk borrower. Moreover, if your eligible pension income is lower than the stipulated income level required for a home loan, that would automatically reduce your borrowing power.
- Interest rate: Your credit provider may also offer you the loan at a higher interest rate for the same reason - higher expected lending risk.
- Age: Typically, home loan terms tend to be around 25 or 30 years. Your age may prevent you from getting approved for a home loan. This is because lenders consider the risk of loans not being repaid in case of the borrower’s demise.
- Non-traditional lenders: Depending on your circumstances - more if your age pension is your only income source - you may need to move away from traditional lenders to non-traditional lenders. The latter offers several home loans for pensioners, but they may involve more complex than the standard process.
Types of Home Loans for Pensioners
Reverse Mortgages
Reverse mortgages are common for those on pensions looking for an additional cash source during retirement.
As the name indicates, a reverse mortgage is the opposite of a traditional home loan. It allows you to borrow money using the equity in your existing home as security for the new loan.
Here’s a simple breakdown of how a reverse mortgage works:
- You to stay in your existing home without making repayments while you live there.
- The interest charged on your loan compounds over time. It increases and adds to the amount you borrow. Interest rates may be higher than on a standard home loan because of the nature of the loan.
- You repay the loan in full, including interest and fees when you or your deceased estate sell your home or moves into aged care.
- If you want to, you could make voluntary repayments earlier. You may be able to protect some part of your home equity from being consumed by your loan. This will help you, for example, ensure that you have sufficient money left to pay for aged care.
- If you’re 60 years of age, the maximum you can borrow is around 15–20% of the value of your home. You could add 1% for each year over 60. This means at 65, the most you’ll be able to borrow will be around 20–25%. The minimum borrowing amount varies but is usually about $10,000.
- Based on your age and lender policies, you can opt to receive the borrowed amount as a regular income stream, line of credit, lump sum, or a blend of these options.
The cost of your reverse mortgage would typically depend on factors such as the amount you borrow, how you choose to receive the amount borrowed, the interest rate and fees, and the duration of the loan.
Furthermore, the cost of your reverse mortgage may vary based on how you opt to take the amount. For example, opting for a lump sum payout may be more costly as you’ll incur compounding interest.
With a reverse mortgage, your debt will increase, and your equity will reduce over time.
It’s advisable to ask your lender to run you through reverse mortgage projections, explaining how it affects your home equity in the long run.
Line of Credit
As a pensioner, a line of credit loan is a suitable way to get a home loan to obtain extra funds while on the age pension.
A line of credit home loan enables you to leverage the equity in your existing home to withdraw funds whenever you want, based on a pre-approved credit limit.
You will need to own your property with sufficient equity before taking out the line of credit loan. This flexible financing option lets you withdraw the amount approved by your lender in a lump sum, or you can spread it out over time.
Points to note when you apply for a line of credit as a pensioner:
- In general, you’ll only need to pay interest only on the amount you have drawn down at a given time.
- So, for example, if you have a $150,000 line of credit and draw down $80,000. You will only be charged interest on $80,000, which will generally be added to your loan every month.
- A line of credit can be compared to a credit card. Being a pensioner, it is a good idea to ensure you have the repayment before availing of a line of credit.
- Despite their flexibility, line of credit home loans come at a potentially higher interest rate than standard principal and interest home loans.
- Most lenders have stricter criteria when assessing applications for this type of loan.
Variable and Fixed-Rate Pensioner Home Loans
Some lenders may offer you regular variable and fixed rate loans even if you’re a pensioner.
- Variable rate home loans: In variable rate home loans, interest rates fluctuate as per RBA cash rate movements. Therefore your monthly loan repayments may increase or decrease as you go along.
However, post-pandemic interest rates in Australia have been consistently rising. In the current scenario, you may find even the slightest rise impacting your financial situation.
Most variable-rate home loans are built around general home buyers and not tailored for those on pension income. Moreover, since your pension is a fixed income, it may not increase at the pace of interest hikes. This means you may find yourself struggling with monthly repayments.
- Fixed-rate home loan: This loan type allows you to lock in an interest rate for a specified period, usually 1-5 years. You’ll have to pay the same (fixed) interest rate during this period.
The chief benefit of a fixed rate home loan when you’re on the age pension is that you’ll enjoy a degree of cash flow certainty since you’ll know the exact amount you need to set aside every month for mortgage repayment during the fixed rate term.
At the same time, if interest rates drop in the long term, you may pay higher repayments than you would have on a variable rate loan.
Over and above, your home loan interest rates are also influenced by other factors such as:
- Purpose: You are buying a home for owner-occupier purposes or as an investment property.
- Repayment: You intend to make repayment of principal and interest or interest only.
- Loan to value: The loan component compared to the value of the property you’re buying, i.e. the LVR ratio.
Bridging Loan
A bridging loan bridges the gap between when you buy and sell, i.e. the period when you own two homes.
To explain, if you’re a pensioner planning to downsize or move home, you’ll mostly want to buy a new home before selling your existing one. Here’s where bridging loans come in handy.
These loans typically come with a shorter term ranging from around six months to when you sell your present home. Depending on your circumstances, you could opt for:
- Closed Bridging Loans: They’re used where the Contract of Sale is finalised and you are sure about receiving funds.
- Open Bridging Loan: This last up to 12 months.
You don’t have to have any repayments during the loan period. Instead, you have to pay interest on completion of the sale and when the loan has been closed. Nonetheless, you may opt to make payments on your loan to reduce interest costs.
Based on the loan terms and conditions, your bridging loan may roll over into the loan against your new home. And, where downsizing has been significant, you may be able to pay off this amount from your sale proceeds.
Furthermore, the stamp duty, legal fees, and other costs can be added to a bridging loan where you have good equity and property value.
Investment Home Loan
While receiving an age pension, you may still qualify for an investment loan. When reviewing your application, your lender will consider the rental income you’ll earn on your property.
The rental income received from your investment property can be utilised towards mortgage repayments. Moreover, it’ll provide you with an extra source of income during your retirement if it fetches more rental income each year compared to the costs of owning the property.
However, income earned from your investment property may impact your pension or any other government entitlements. So, be sure to seek expert personal advice or contact Centrelink to know the extent of the impact on your pension when you take an investment loan.
What Government Assistance is Available for Pensioners?
The Australian Government offers old citizens alternatives to private home loans, which you could consider too.
Home Equity Access Scheme (Earlier known as Pension Loans Scheme)
If you meet the eligibility criteria, this scheme provided by Services Australia and the Department of Veterans’ Affairs allows you to get a voluntary, non-taxable fortnightly loan from the Government.
Here’s how the Home Equity Scheme works:
- Offer security: You choose the amount you want to offer as security and secure your loan against the real estate that you (or your partner) own in Australia.
- Fortnightly income: You then choose how much you get paid fortnightly. Notably, your combined pension and loan payments must not exceed 1.5 times your maximum fortnightly pension rate.
- Advance payment: From 1 July 2022, you can receive an advance lump sum payment of your loan. This is either in addition to, or instead of, your fortnightly loan payments. Considering this option may reduce the fortnightly loan payment you’ll receive for the next year, i.e. 26 fortnights.
Per the offer, based on your (or your partner’s) age and the amount you offer as security for your loan, there’s a maximum limit to how much you can borrow over time.
Disability Support Pension
Many lenders treat your disability pension as a reliable source of income and will lend you money.
You should have your additional paperwork to access this loan. This includes Centrelink documents confirming your benefits, disability pension, proof of assets, bank statements, and other documentation you would need in a regular home loan application.
Most cases involving disability pension are assessed case-by-case, considering your age, assets and personal loans, debts, etc. Your eligibility to get a home loan will depend on your income and how much can be used to service your loan.
Therefore, you may get a custom loan adapted to your circumstances.
Veterans’ Pension
If you’re a veteran, your pension is a guaranteed regular income until the end of your loan term. Therefore, it may well meet the criteria of timely and regular repayments. As a result, you may be able to access various home loan options and discounted interest rates offered to borrowers with a standard income from employment.
Your approval chances may improve if you show a substantial deposit, preferably 20% of your property price, and a good credit rating.
However, if you’re veteran’s pension is your only source of income, or you’re borrowing at an advanced age, you would benefit from working with a specialist lender in veteran home loans or non-standard home loans.
If you receive veteran’s pension payments under the following categories, you could apply for a home loan:
- Department of Veteran Affairs – Service Pension
- Department of Veteran Affairs – Age Pension
- Department of Veteran Affairs – War Widow’s Pension or Widower’s Pension
- Department of Veterans’ Affairs Incapacity Pension
If you’re receiving any other veteran pension, it may be acceptable subject to lending criteria and if they are considered ongoing and permanent.
When applying for a home loan on your veteran’s pension, you would need to provide proof of your veteran income stream, i.e. veterans’ affairs statement, etc.
How to Apply for a Home Loan as a Pensioner?
While there are different ways to apply for home finance, you should opt for one that suits your homeownership objectives and financial situation.
- Standard Home Loan: You could access loans at competitive rates like other home buyers if you have additional income apart from age pension and/or you’re only considering borrowing a small amount. If so, be sure to look up the rates offered by lenders. In addition, our free, online Home Loan Comparison Calculator can help you compare different home loans to determine which is more feasible for your financial situation.
- Specialist Loans: Many lenders specialise in home loans that help home buyers with unique loan needs meet their home ownership goals. This may include special pension loans such as reverse mortgages to help elderly citizens release equity from their existing homes.
If you have trouble qualifying with big banks, a specialist credit provider may be a suitable option to access a home loan as a pensioner. However, at the same time, these lenders often charge higher interest rates and fees, leading to higher mortgage repayments.
What Documents Do Pensioners Need for Home Loan?
When applying for a home loan as a pensioner, you will most likely have to provide additional documents than younger borrowers. In most cases, you’ll be required to show further proof of your income, assets, and saving, though these may vary based on the lender.
If you’re a pensioner and you’re looking to apply for a home loan, make sure to have the following documents on hand:
- Proof of identity: This is established through primary documents, including your Australian passport and driver’s license. You should also keep documents like your birth certificate, citizen certificate, credit card statements, photo IDs or licence/permit issued by a State or Territory, etc.
- Proof of funds: This is to assure your lenders that you have the required deposit.
- Bank statements: Your lender will seek proof of Centrelink benefits received by you. Noteworthily, some lenders may ask you to supply the most recent (6 months) bank statements.
- Confirmation letters: Among the other documentation, you will also need to show notes from Centrelink or any other relevant government department confirming the details of Centrelink benefits and disability pension.
What to Consider as a Pensioner Before Applying for a Home Loan?
Now that you’re hopefully better informed about the choices for your pensioner loan, here are our top recommendations for what to consider you apply:
Understand your Finances
As most pensioner home loans are assessed similar to other loans, your lender will study your income sources, qualifying pension, bank statements, expenses, assets, etc. They’ll also gauge your access to credit services.
So, if you have outstanding credit card payments, personal loans, and other debts, clearing them up at this stage may boost your chances of getting approved. You could also cancel your unused credit cards.
Likewise, ensuring a good deposit will further reassure your lenders about your financial stability.
Ensure a Good Credit Score
While lenders may treat your senior age and limited income as high-risk, having a good credit score will add weight and credibility to your application. Access your credit report, and ensure that it accurately reflects your financial status.
Loan Term
Your age may also prevent them from getting approved for a home loan, as traditional home loan terms are either 25 or 30 years. In addition, being a pensioner, your lender may consider you a high-risk borrower.
With this in mind, if you’re looking for a home loan, explore the different loan types, and seek products that suit your circumstance. Opting for a shorter loan term or smaller loan amount may also improve your chances of qualifying.
Research the Market for the Most Suitable Home Loan Deal
Firstly be clear about your objectives, whether it’s downsizing, relocation, or investment-driven. Then, once you know what you want, scout for deals that match your requirements, research the documentation to be submitted, early repayments, applicable offset accounts, additional features, etc.
Regardless of the type of loan you opt for, obtain complete clarity about the terms and conditions of the loan from your credit representative.
Check if it’s a taxable or non-taxable loan, and read the relevant Product Disclosure Statement (PDS), Target Market Determination (TMD), and other literature available on the particular loan product. If you are still in doubt, seek independent advice before signing the dotted line.
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