Most people plan to pay their mortgage off by the time they retire—but sometimes life gets in the way. Major events like divorce and remarriage can mean you’re still paying back the bank well into your late sixties.
The Responsible Lending Code means banks are bound to look more closely at their borrowers and consider factors like age when approving any new loans—age can restrict your borrowing power.
When you draw down a mortgage, banks usually limit the term of the loans, so it is paid off by retirement, or 65 or 70 years of age. This ultimately affects how much debt a person can service, and how much an individual may borrow. Once you hit 50, it is a more critical consideration for banks (even if a person has a good deposit to put towards a home from a divorce settlement or savings) because you have less time to pay it back.
Banks commonly ask older borrowers what they intend to do when they reach 65 if applying for a loan that would not be repaid by the time they’re eligible for NZ Super. In essence, banks are looking for borrowers to have an exit strategy that minimises any risk. This can include using KiwiSaver to pay off any outstanding amount or downsizing to free up cash and equity.
Even if you’re considering renovating once you’ve paid down your mortgage, banks will still consider topping up an existing mortgage as an entirely new loan—and will want to see credit checks, test rate calculations, repayment histories, alongside plans.
Research has shown that a third of people will still have a mortgage at 65—while this can’t always be avoided, it’s advisable you work to pay off your mortgage before you intend retiring. Apart from escaping the close scrutiny of the banks, it gives you financial freedom at the end of your working career. Often this means resisting the urge to keep leveraging and upsizing your house in your 40’s and 50’s.
If you’re looking to buy a new home later in life or contemplating how to get debt free by 65, then talk to a trusted mortgage adviser. We can help you put solid plans in place to reduce stress in your retirement.
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