Don’t let your age get in the way of purchasing your own home; here are some tips to help get you started.
Home loans are a great way to help you get the additional funds you need to purchase a house or make improvements to your house. However, as pensioner incomes tend to be lower than the income of regular borrowers, lenders may view you as being a high-risk borrower as it may be more difficult for you to service your loan.
In turn, this can make it difficult for pensioners to receive home loans. However, there are many banks that are willing to offer home loans to individuals receiving pension benefits. Read on to learn more about home loans for pensioners.
- Reverse mortgages A reverse mortgage allows you to borrow funds using equity from your home as security for the loan. A reverse mortgage can either be paid as a lump sum, a regular stream of income, a line of credit or a combination of these. No income is needed to qualify and for this reason, the interest rate tends to be higher. You must repay the sum of borrowed money when you sell your home, pass away or move into aged care.
- Variable rate loans Variable rate loans are a common loan choice in Australia. With a variable rate loan, your interest rate is subject-to-change based on interest rate fluctuations. For example, when interest rates are low, the interest rate on your loan should also be low, allowing you flexibility and possible cost savings.
- Fixed rate loans A fixed rate loan is more secure than a variable rate loan. With a fixed loan, the interest rate for your loan will be set upfront and you commit to this rate for the entirety of your loan. This means you avoid any possible fluctuations in interest rates and you also know your repayments upfront. This kind of loan takes the stress away from worrying about interest rate changes.
- Line of credit loans A line of credit is a funding line which uses the equity in your home. It’s an approved amount that you can use a bit at a time or all at once. You loan is approved against a security and you can draw on this loan amount at any time. You only pay the interest on the amount that you use. For example, if you get a line of credit of $200,000 and only use $50,000, you only pay interest on the $50,000. These are good for those who are unsure if they need the full value of a loan.
How to compare home loans
- Interest rates. Interest rates are one of the most important elements to compare as interest is the biggest expense for home loans. For pensioners, it’s important to look for the lowest interest rate because this is what will help you save money.
- Home loan flexibility. It’s important for your home loan to provide you with flexibility. This may be flexibility in repayment schedules, flexibility in making additional repayments and redraw facilities. Compare each loan and see what flexibility it can offer you.
- Eligibility requirements. Some home loans will require you to meet certain eligibilities in order to take out that home loan. This may include regular source of income, a good credit history and more. Pensioners in particular should compare the eligibility requirements of home loans because some may be more appropriate to apply for than others.
- Fees and charges. Most home loans have mandatory fees and charges that you may have to pay. Compare any potential fees and charges each loan has - these may be either upfront fees or ongoing fees - and select an option with lower fees to help save money.
- Loan term. Each home loan provided by financial lenders will have different loan lengths. Compare and select the home loan that provides you with the loan length to meet your needs.
Generally, a disability pension is considered a valid form of income by most lenders. Therefore a home loan application for someone on a disability pension is not treated any differently from an application where someone services their loan with other forms of income.
Like any applicant for a home loan, the lender will review whether the amount of income support you receive is sufficient for you to comfortably repay the loan.
Most lenders will review your application on a case-by-case basis. Your eligibility for a home loan will depend on the amount of income you receive and how much of this can be used to service a loan.
Other factors including your age, assets and debts will be assessed by a lender on an individual basis.
Each lender will have different eligibility criteria, so it’s best to speak directly with your mortgage broker or lender to determine whether a home loan is suitable for you.
Extra documentation for disability pensioners
Among other eligibility criteria required by the lender, you’ll generally need to provide the following:
- Evidence of funds to complete the deposit.
- Bank statements showing Centrelink benefits being paid into your bank account (i.e. some lenders require 6 months of recent bank statements).
- Letter from Centrelink confirming the status and nature of your disability pension.
- Gives you funds when you need it. These home loans allow pensioners to enter the property market and give you the funds you need, when you need them.
- Extra benefits. Some home loans available to pensioners come with extra benefits such as low or no interest rates, flexible payment plans and advance payments.
- No proof of income required for reverse mortgages. With reverse mortgages, no proof of income is required. It’s important to note that other home loans will require proof of income unless it’s a low doc loan.
- Higher interest rate. Reverse mortgages tend to have higher interest rates compared to other home loans.
- Eligibilities. Some home loans have specific eligibility requirements you must meet that may be quite stringent.
Pensioners applying for home loans must keep in mind that their income and financial position might limit their success in getting a home loan. This is mainly because the pension is lower than the normal income of other applicants who are applying and the income level required. If you have assets and believe you can meet lending requirements, it might be a good idea to discuss your position in person with your financial provider or mortgage broker, as applying online may be difficult if you can’t demonstrate your capacity to repay the loan. Also keep in mind that a small number of home loan lenders will set an age limit for different products, so be sure to check the terms and conditions before applying.
What is a home loan?
A home loan is when an advance of money is provided to a borrower from a lender when they want to purchase their own home or land to build their home. The lender will give you the money you need to purchase your house or make improvements. Home loans are primarily for those who want to enter the property market but do not have the full property value saved up. Home loans are best suited to anyone who has a good credit history and wants to purchase a house but does not have all the funds required.
How do home loans work?
When you want to purchase a home but don’t have the full amount of the funds that you need to purchase, then you should apply for a home loan. Typically, you apply for a home loan if you meet the eligibilities of each financial lender. With most home loans, you are required to pay a deposit. Typical deposits tend to be around 20%, but in some circumstances, your deposit can be as small as 5%. The lender will give you the money you need to purchase your home and you are liable to pay the loan back within a certain amount of time, as well as interest on the loan and any additional fees.
Can I still apply for regular home loans?
Yes, pensioners can still apply for regular home loans that aren’t specific home loans for pensioners but you should keep in mind you may not be successful if you don’t meet eligibility or income requirements.
Other than my pension, what else will be considered in my application for home loans?
Any other forms of income you may receive, your previous credit history, and any other assets that may be in your name can be used to boost your home loan application. Usually your pension is taken in account if it is taxable.
Will I need to come up with a deposit if I’m on a disability pension?
Generally, a person on a disability pension will need to come up with a 20% deposit. This is because there is no other salary or other source of income that can be used to service the loan- there is little security should you default on your loan.
Again, this criteria varies from lender to lender.
If I’m on a disability pension, what happens if I have a co-borrower?
If take out a mortgage with a co-borrower, generally your ability to meet your repayments is increased so the lender will view you as being a less risky borrower. In this case, your application may have a greater chance of being approved.
Some lenders may only accept your application if your co-borrower is working. For instance, some lenders will assist you if you’re buying a new home together with your son or daughter. However, some banks may not be able to help you if you're borrowing on your own.