Home Loan Exit Strategy
When do you need a home loan exit strategy and how do you create one?
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If a lender is concerned about your ability to exit your home loan they may ask about your exit strategy before approving your mortgage. It's nothing to worry about, but it means you'll have to do a little more work on your application.
When will I need an exit strategy?
There may be some very unique investment property circumstances that require an exit strategy, but the most common case in which you’ll need to provide one is if you’re over the age of 50.
Because home loan terms run for 30 years and retirement age is 65, lenders can be hesitant to lend to borrowers over the age of 50 unless there’s a clear plan in place for paying off the mortgage either before or after retirement. However, if you can demonstrate a solid plan, you’ll be able to make a much better case for getting your home loan approved.
What are some exit strategies banks might accept?
The sale of your primary place of residence is not considered an acceptable exit strategy by some lenders. However, the sale of other assets can form an acceptable exit strategy:
- Shares. You can provide lenders with a detailed overview of your share portfolio to demonstrate that the sale of your shares will help to pay off your home loan.
- Investment properties. While lenders may be hesitant to accept the sale of your primary residence as a valid exit strategy, they will usually accept the sale of an investment property or the access of equity in an investment property.
- Superannuation. Since you’ll be able to access your super upon retirement, lenders will accept this as part of an exit strategy.
- Inheritance. If you have received or are likely to receive an inheritance during the term of your loan, some lenders may accept this as an exit strategy.
In addition to this, you can inform the lender of actions you plan to take to form part of your exit strategy. For instance:
- Continued work. If you plan to continue working past the age of 65 or plan to move into part-time work, let your lender know this.
- Shorter loan term. You could also take on a shorter loan term to ensure that your home loan is paid out before retirement. This will, of course, depend on your ability to service higher repayments.
- Continued investment income. While you may no longer be working after retirement, this doesn’t mean your income will cease. If you have investments that generate passive income, such as shares that pay dividends or ongoing rental income from an investment property, this may be an acceptable exit strategy.
- Reverse mortgage. If you plan to take on a reverse mortgage to access equity in your home, some lenders may accept this as part of an exit strategy.
- Downsizing. As mentioned before, most lenders won’t accept the sale of your primary place of residence as an exit strategy. However, if you have a concrete plan to downsize upon retirement, some lenders may take this into account.
How do I create my exit strategy?
You can inform lenders about your particular circumstances in your home loan application. You can let them know about your assets and passive income in the relevant sections on the application.
If the application form has no section or questions related to your exit strategy then you can write a letter setting out your home loan exit strategy. Be sure to keep the letter clear and detailed, perhaps with a list of actions you plan to take.
A good mortgage broker can help you draft an exit strategy and present it to a lender in the form that’s likely to give your home loan application the best chance of success.
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