At age 40 most people won’t be thinking about retirement. There are more important things to consider. At 40, there are home loans to pay off, a career to manage, kids to educate, a family life to enjoy. It’s a great time.
So why do the Banks have to go and spoil a good thing?
Borrowing as you get older
For a while now there have been rules and guidelines covering responsible lending to people over 50. Naturally, Banks are aware of the limited time left for employment and producing income so they show caution. Rather than measure someone’s ability to meet their commitments using income, an exercise called servicing, the Banks will also look at the total financial position of an applicant. How strong that position is becomes more important the less time that’s available to earn income. Banks don’t want to be in the situation of lending to someone who obviously can’t repay the loan within the term. This has been standard practice for a number of years now.
Put simply, a Bank wants to see how the debt will be repaid when retirement is approaching.
This is known as an exit strategy.
Banks are changing the rules… again!
All Lenders are constantly reviewing their loan books and they will happily alter the rules to reflect any risks that become apparent as well as any legislative changes they may have to react to.
As part of that process, the most common question a borrower over 50 will be asked concerns an exit strategy. Naturally, when someone over 50 wants to borrow on a 30 year term the Bank wants to know how the debt will be cleared before, or after, retirement. Not knowing this detail creates potential risk and we all know how much Banks don’t like risk.
This exit strategy will be different for each person as it centres on individual requirements for retirement and really, it’s nothing new.
However, there has been a subtle shift in how they are looking at this situation now. Rather than looking at 50+ as the trigger they are now looking at anyone who has a 30 year loan expiring by, or after, age 70.
In case you missed it, that means that 40 is the new 50!
Effectively, from age 40, you need to incorporate an exit strategy for any borrowing you do.
Honestly, I’m not sure many 40 year olds would have seriously considered an exit strategy for a loan. So, It’s is obvious that this change in credit criteria is aimed at making the Bank more comfortable with longer loan term, not the customer.
On the plus side though, while this requirement will give comfort to the lender, I think it also provides a very good reason for people to start planning for the future.
Debt minimisation is an Essential requirement
Planning to reduce the debt or repay it is something that has to be considered from a much earlier age than before. Personally I think this is a good thing. A debt minimisation strategy is an essential tool to have in place and no doubt serious investors would already be contemplating that.
We also realise that holding debt is now more complicated than it has ever been. It’s no longer enough to simply factor in borrowing without considering the effects of this new change. Everyone has a finite working life and these new conditions spell that out quite clearly.
Another consideration for investors are the safety factors that have to be addressed as a consequence of taking on the debt. Do you have enough insurance for example? Personal insurance in case of injury, income protection, mortgage protection, death cover etc. While it all sounds too complicated, think about what the impact of not planning can have on your future.
At any time, a property investor or any investor in general should have a handle on their cash flow. In fact, not just investors, everyone should have an understanding of where their money goes. This is especially important if you are to take advantage of any opportunities that come by and you need to make a quick decision.
Knowledge allows decisions to be made.
How do you manage your cash flow? Well, naturally, you need to identify what is coming in and what is going out. I know it sounds obvious but not everything is obvious to everyone.
Why am I asking all these questions about cash flow and budgeting and debt minimisation?
As more and more control is applied to the Mortgage space, through the Banks Credit Rules as well as Government Legislation, it’s very clear that having a strong focus on cash flow and debt minimisation is an essential requirement.
The underlying need for people to take control of their financial position is becoming increasingly important. Added to that is the need for an effective exit strategy to be worked out well in advance.
We all know that Planning is important for every worthwhile endeavour. How you are being held accountable for your actions in executing that plan is best done by someone else.
We recommend using a Financial Planner who is experienced in both cash flow management and debt reduction strategies. Seriously, your financial future may depend on it.