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Can I refinance my mortgage if I am retired?

As Australia’s property prices continue to soar, gone are the days where it was standard to have your home loan fully paid before retirement. Research from the Australian Housing and Urban Research Institute (AHURI) has found that the number of Australians retiring with debt has increased substantially.

When you retire, your financial situation could be set to alter dramatically. Refinancing is definitely possible after retirement, but you could find yourself placed in a “high risk” category by lenders.

In this article, we’ll go through what you need to know about refinancing before and after retirement. Plus, we’ll provide you with some tips on how to pay off your mortgage before retirement if that’s a priority for you.

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Refinancing before, and after turning 55

While you can generally refinance at any age, the loan options available to those close to retirement or already retired do grow smaller. This is based on lenders risk appetite and does vary considerably from lender to lender.

While your options may be more limited it is not impossible. Lenders will closely examine your income, expenses and any assets, investment properties, shares, etc. you might have. Typically, you’ll have a better chance of getting approved if you refinance before you turn 55.

How will you repay your mortgage when you’re retired?

If you refinance pre-retirement and your 10 or 20 year loan term is likely to extend into retirement, lenders look for your exit strategy. This means they will want to know how you will repay your mortgage once retired.

For most Australians, retirement signals a drop in income. Typically, you’ll no longer be receiving a reliable source of income from your job and may have to rely on your superannuation funds and/or the pension to make loan repayments.

It’s important to spend some time working out how you’ll be able to comfortably make repayments.

Should I refinance my mortgage before retirement?

There are a number of reasons to consider refinancing before you retire. Figure out what your financial situation and housing needs will be, and assess the pros and cons of refinancing. A major reason to refinance for many is that you won’t always be able to afford your current repayments after retirement.

If your monthly repayment amount is too high, you could consider refinancing to a longer loan term. This would increase the amount of time you’ll have to pay off your loan and in turn, reduce your monthly repayments.

However, the longer your loan term, the more interest you’ll end up paying. Plus, you could end up still paying off your mortgage when you’re 80! So, be cautious about extending your loan term. Many lenders will be less willing to do this anyway, because of the high risk.

Another option could be to refinance to a lower interest rate and/or a loan with fewer fees. Even a marginally lower interest rate can make a big difference to your repayments. Speak to your lender about reducing your interest rate, or consider finding a new lender.

Some retirees will still have an income, possibly from a rental investment property or dividends from another investment. This may mean that making your current repayments won’t be difficult after retirement. Alternatively, you shouldn’t have issues refinancing after retirement if that’s what you want.

Can I refinance my mortgage after I retire?

Yes, you can refinance your mortgage after retirement. However, as stated above, the process can be more difficult as lenders could view you as a risky borrower.

This will be less of an issue if you can show that you are still in a strong financial position. To do this, work on building significant savings, superannuation and a healthy credit rating. You could also consider selling assets or accessing investment dividends.

Refinancing is a smart move to make if you are struggling with your current repayments, or would like to restructure your home loan. Even if you’re comfortably making repayments, you could probably find a more competitive interest rate out there. If you have any other debts, you may be able to roll them into your home loan with debt consolidation.

Plus, if you move and downsize to a new home, refinancing can make a lot of sense. Potentially, you could end up paying off your mortgage faster and pay less in interest.

What is a reverse mortgage and cash-out refinancing?

A reverse mortgage is a possible option for those aged over 60 who need access to money and own their home. It allows you to borrow up to about 20-25% of the value of your home. This option needs to be approached with extreme caution, consultation with an experienced financial advisor and family. It isn’t available with many lenders, and it is very risky.

How it works is that you remain in your home and don’t have to make repayments while living there. When your home is sold, you repay the reverse mortgage in full (including interest and fees). You can structure it to get out a lump sum of money (e.g. for a renovation), or to get a small sum of money annually.

There are a number of downsides to reverse mortgages:

  • Your debt will grow and equity will decrease
  • Fees and interest add up and compound considerably over time
  • Reverse mortgages usually have higher interest rates
  • Your estate will reduce
  • Has the potential to cut into money you require for future home maintenance or medical bills
  • Anyone else living with you who is not also an owner may not be able to stay in the home when you move out or die
  • Your eligibility for the Age Pension could be impacted

Reverse mortgages are not the best solution for everyone. It’s best to speak to a financial advisor before making a decision.

A similar option is cash-out refinancing where you can tap into your equity to improve your cash flow in some way. The difference here is that you need to make regular repayments on your increased debt.

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Selling and downsizing

If you’d like to avoid taking your mortgage into retirement with you, selling and downsizing to a smaller property is an option. Many retirees move from larger cities to small coastal towns upon retirement. Not only does this save money, but it offers a fresh new start to match a big change in your life.

Doing this, or moving into a retirement home, could give you the extra money you need to repay your home loan in full or at least minimise it significantly. And the best case scenario is that you make a nice profit and you have some cash left over from the sale after repaying your mortgage.

When thinking about downsizing, make sure you consider whether the new home suits your lifestyle, health needs and budget. By downsizing, you’ll likely experience lower bills, increased cash flow and have an easier space to maintain.

If you aren’t ready to sell and downsize your home, you could consider renting out a room or space in your home to make some extra money. Keep reading for some tips on how to pay your mortgage off before you retire.

How to pay off your mortgage before retirement

If you are edging closer to retirement, it might time to start thinking about what you can do to retire without a mortgage. Here are 4 tips to help you get closer to paying off that home loan:

1. Ask your lender for a lower interest rate

You don’t always have to refinance to secure a lower interest rate. Often, you can simply call up your lender and negotiate an interest rate decrease. You’ll be in a better position to do this if you have reliably made your repayments on time for an extended period of time.

If you aren’t confident asking your lender to reduce your interest rate, Lendi’s Home Loan Specialists will be happy to negotiate on your behalf.

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2. Refinance your home loan

Depending on your situation, refinancing may be a smarter option. Some lenders unfortunately won’t budge on interest rates, so you may have to switch lenders. There are usually some expenses involved with refinancing - particularly when you switch lenders - so make sure you are aware of these costs.

However, refinancing isn’t just for getting a lower interest rate. You can completely restructure your mortgage, add on loan features and more. For example, you could reduce your loan repayment term to align with your intended retirement date. Bear in mind that when you reduce your repayment term, your monthly repayment amount will increase, but you’ll spend less in interest overall.

Find out how the refinancing process works here.

3. Speak to a financial advisor

While you can devise your own plan, it’s smart to seek professional advice and find out the best way to get your property paid off.

4. Create a plan

If speaking to a financial advisor or planner isn’t in the cards right now, you can create your own plan. This is a great thing to do as you enter into your 50s to work out how you should prioritise your spending and saving in the lead up to retirement.

Got a home loan question? Just ask!

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, home loan, refinance, lender, equity, retirement planning, selling property, reverse mortgage, cash out, downsizing

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