What is an exit strategy and how will it affect my loan application if I’m an older borrower?
If you are of a certain age and looking to take out a mortgage, lenders will start wanting to understand how you will repay your home and investment loans before retirement. Generally, borrowers over 55 years old will have to provide some sort of exit plan. Some lenders require it for any borrower whose loan term exceeds their retirement age. With most new loans set at 30- or 25-year terms this is anyone over about 45 really.
For example, if you’re 30 years old and your loan is for 30 years then of course you will have paid it off in plenty of time before you retire. But if you are 45 years old with a 30-year loan, even if you retire at 70 with a few years left of the loan to repay, this is when an exit strategy will kick in.
An exit strategy is essentially a backup plan to show how you will complete your mortgage i.e. pay off your loan before you retire. An unencumbered owner-occupied property by the age of retirement is the goal. Failing that a borrower (often with the help of their mortgage broker) needs to show that the proposed loan can be paid out or serviced by other means post retirement.
What do I need to take into consideration when planning my exit strategy?
- Reducing the loan term – if in the example above you change your loan term to 20 or 25 years and you can afford to make the repayments, this would be an acceptable exit plan. Just remember that each lender has different rules on retirement ages.
- Superannuation – you can use a lump sum from your superannuation account or any ongoing income from it to contribute to making required repayments after you retire. Some lenders will accept this as evidence you can repay the loan.
- Downsizing your property – it’s an option with some lenders to have the plan to sell your home and move into something cheaper, smaller and more affordable after you retire. Not all lenders will allow this strategy though and it is also not appropriate if someone is already in a small apartment.
- Investment property – if you have investment assets that can be sold off to finalise any loan balances this is generally acceptable.
- Share portfolio – some lenders accept your share portfolio as part of your exit plan.
- Income after retirement – some post retirement income streams are accepted by certain lenders if they are sufficient to service the loan after you retire e.g. rental income, dividends etc.
Do I have to show documentation to back up my plan?
Yes, you will need to prove that your exit strategy is realistic by providing evidence like your most recent Superannuation statement. Your broker can help you put together a plan by using a superannuation calculator to project how much super you will have when you retire, and an amortisation calculator for the proposed loan.
There are some things that lenders won’t consider for your exit plan; things like future inheritances, the sale of a business, any predicted increase in your wages or a bonus, any court/family settlements, or workers compensation claims. Anything that isn’t guaranteed.
Do I need an exit strategy for an investment property?
No technically you don’t need an exit plan as you can sell the property at any time to repay the debt. However, if you also had existing owner-occupied debt then you would still be caught by the same hurdles even if the loan was for the purchase of an investment property. The home loan can’t just be ignored. There are also a few lenders that will expect you to have an exit strategy even if it is an investment.
Who can help me plan my exit strategy?
We can of course, give us a buzz and we can talk over all the different options you may need and what lender will be suitable for your circumstances.