Home Loans for Pensioners

Shorter loan terms

In Australia, home loans are typically structured over longer terms, think 25–30 years. If you apply for a loan at 65, it’s much less likely you’ll get a 30-year term than if you applied at 45. Lenders may not offer a long-term loan, especially if they think it’ll extend beyond the borrower’s lifetime. With a standard home loan, a shorter term will mean higher repayments. Luckily, there are loan options that suit pensioners and retirees (more on this later).

High interest rates

If your only source of income is your pension, your lender may decide that you may not have enough left over after your living expenses are considered to pay off your loan. This means lenders tend to see home loan applications from pensioners as high risk. Assigning a higher interest rate to the loan is the lender’s way to offset some of this risk.

Reduced income

Retirement could mean pensioners don’t have access to the same income levels they enjoyed when working fulltime. Plus, retirement income or pension tends to be fixed; meaning you can’t pick up overtime shifts or ask for a promotion. Because of this, lenders assess pensioner applications to determine whether their pensions (along with other assessable income) can cover their loan repayments.

Assessable income

What does your retirement income look like? Do you have other income streams apart from your pension? Lenders like to see a stable, regular income coming in – things like age pension, disability support pension, regular superannuation payouts, rental income from an investment property, and even consistent dividend yields from investments.

Spotless credit history

A flawless track record will definitely strengthen your home loan application. Any defaults, late payments, or outstanding high-interest debts (like maxed-out credit cards) will be an immediate red flag. Lenders want as little unpredictability as possible.

Exit strategy

This is a mutually agreed-upon plan between you and your lender that details exactly how you’ll clear the debt should you no longer be able to meet your repayments, or if you pass away. This might involve downsizing to a cheaper property, selling an investment portfolio, or tapping into a lump sum of your superannuation.

Reverse mortgage

A reverse mortgage lets you borrow against the equity in your current home, while letting you continue living there. Because you don’t make regular repayments on a reverse mortgage, with the loan being repaid after the property is sold, the amount you can borrow typically depends on your equity and age.

The good news is that if you took out a reverse mortgage after 18 September 2012, you’ll have negative equity protection. The amount you owe to your lender can’t be more than the value of your home – whether in terms of market value or equity.

If you took out a reverse mortgage before this date, check your contract. If it doesn’t include negative equity protection, talk to your lender or get independent advice on what to do.

The older you are the more you should be able to borrow, because a shorter loan duration means there’s less risk of your loan outpacing your equity. While the most you’re likely to be able to borrow at 60 is 15–20% of your home’s value; you might want to think of it as adding 1% for each additional year. As an example, this means that at 65, you may be able to borrow 20–25%.

The minimum amount you can borrow is usually $10,000, although the dollar figure could also vary by lender.

A reverse mortgage may itself be structured as a line of credit, lump sum, regular payments, or a combination, depending on the lender. This allows you to take a lump sum or withdraw smaller amounts over time. Interest is only charged on the portion you’ve used, not the full approved credit limit.

Line of credit loan

A line of credit loan, similar to a reverse mortgage, allows you to use the equity in your home to access funds. But instead of receiving a lump sum, you can borrow up to a set credit limit as and when you need it.

Lines of credit home loans often come with higher interest rates than standard home loans, so it’s important to compare costs carefully and consult a mortgage broker before proceeding.

Home Equity Access Scheme

Previously known as the Pension Loans Scheme, the Home Equity Access Scheme is a government loan available to eligible older Australians who are Age Pension age or older, including some people who do not receive the Age Pension. If you’re Age Pension age, you may be able to borrow money using the equity in your home as security. The loan is usually paid to you fortnightly, in an advance as a lump sum, or a mix of the two.

You’ll need to pay the loan back eventually, along with interest and legal costs. But the interest rate might be generally lower than what you’d get with a reverse mortgage, although this isn’t always guaranteed. Importantly, there’s a no negative equity guarantee, so you won’t ever owe more than your home is worth.

If you’re unsure whether it’s right for you, you can check your eligibility with Services Australia or speak to their Financial Information Service officer for guidance. You can also check the Department of Veterans’ Affairs (DVA) website on how to apply for this scheme.

Variable-rate home loan

Variable-rate home loan is a type of home loan where your loan’s interest rate can change at any time, and therefore the amount of your regular loan repayment can also change. For pensioners, it would be a good idea to consider that this type of home loan might potentially come with a shorter loan term and higher interest rates. Also, while government pension payments go up twice a year to help keep up with the rising cost of living, these increases don’t always happen at the same time as interest rate rises.

Older Aussies who are still working or have regular income from investments and superannuation may qualify for variable-rate home loans. But you might face tougher lending criteria than those who are still active in the workforce with full-time work. You might also want to consider settling for a shorter loan term because of shorter life expectancy.

Fixed-rate home loan

Fixed-rate home loans allow you to lock in on an interest rate for a certain period – generally up to five years. While in the ideal world, this type of home loan may be available to pensioners who have plenty of savings or are planning to borrow a small amount, it may not always be easy to access and maintain for everyday older Aussies who have long quit the workforce. There are many reasons, including a lack of flexibility and expensive break fees you might need to pay to exit the loan early.

Break fees could sometimes amount to tens of thousands of dollars. If you need to pay off the loan early, access savings, refinance, or downsize, this amount may not be easy to come by, out of left field – especially for someone living off a pension.

And given that life changes typically happen later on in life – health issues or moving into care – fixed-rate home loans may not give the flexibility you need to adapt to these sudden changes.