The new lending regulations that have banks going through your statements with a fine-toothcomb and assessing what you spend on uber eats and netflix might feel a bit judgey (and it kinda is).
That judgement impacts how much people with good incomes and strong equity positions can borrow.
The solution for making the banks less judgey is fairly simple, although not always easy: create proof of good financial management by cleaning up your act for at least three months, to show the bank evidence of regular savings and financial discipline. If you’re a spender or have never done this before, then it may be tough.
What’s not such an easy fix is the impact the legislation (The Credit Contracts and Consumer Finance Amendment Act) is having on older borrowers – those over the age of 50.
Even tidy bank statements, or a huge amount of equity in your home, won’t change the unassailable fact that you’re getting older. Banks have always been more circumspect about older borrowers, but never more so than now.
The rules that require the bank to evidence a borrower’s ability to service and ultimately repay a loan becomes more difficult to satisfy when that borrower comes within 10 or sometimes 15 years of the pension age.
Whether or not you have any intention of actually retiring at 65 seems immaterial – the banks factor in that you’ll either choose to, or have to, reduce your hours and thus your income around then.
That’s often when you’re suddenly confronted by the fact there are only 10 or so summers left of your working life, and you have a yawning gap in your retirement savings so large you’re looking to leverage to help close it.
You’re often at the peak of your earning potential, arguably at your wealthiest, and yet suddenly the bank starts to look at you less favourably. That can feel insulting – (because it kind of is!)
As banks tend to want any mortgage repaid by age 70, at the latest, that forces the default loan term to be shorter and repayments higher, which then impacts your cashflow- often to the point where the bank says ‘no’.
The frustration here is if you’re investing in property it’s likely that you never intended to repay the loan before you sell it – but the banks don’t factor that in. It’s also likely that rent from the property will be helping pay the mortgage – but they tend to discount that assumption as well.
So, how do you solve the problem? Obviously, there are a number of other alternatives to consider to close your retirement gap – like earning more, spending less, or working longer- although I find when I suggest these options to clients there’s little appetite for them!
When the banks don’t play ball, you can often find more relaxed lending conditions proffered by ‘non-bank’ lenders.
They get a bad rap because they charge higher interest rates but, provided you are a good candidate, the rates may only be 0.5 – 1% higher. The benefit is the lending terms are usually significantly more favourable – assessing your loan repayment by age 80 instead of 70 years and offering longer interest-only terms. For that reason, a ‘non-bank’ workaround can end up being more favourable in your later years, despite the interest rate differential.
When deciding what lending product (or any financial product for that matter) is best suited to you, you first need to understand what problem you are trying to solve, as that is the starting point of determining the right strategy. In this instance, the problem you are trying to solve is how much leverage can I get access to help sort my retirement, when the bank isn’t keen on lending to me? In solving that you need to know the terms of the lending aren’t going to kill you, i.e., that you can afford the repayments, come what may, factoring in the interest rates, the term and whether or not you are paying the principal. But get clear on your strategy first before you weigh up your options. Whether the solution is a little unorthodox is not the point – the point is that you were able to solve the problem.
Hannah McQueen is a financial adviser, chartered accountant, personal finance author and the founder of enable.me – financial strategy and coaching.
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This article originally appeared on www.stuff.co.nz