How long is too long?
Just because you can, doesn’t mean that you should. Such has been the blasé nature of borrowing against your home in recent history, many people have lost sight of the fact that a mortgage still needs to be paid off at some point. I regularly see clients that have refinanced 2 or 3 times in the past and their loan term is still at 28 years! There may be a genuine reason for extending the term each time; however, it appears that the default position has been to refinance back to 30 years each time to keep the repayments as low as possible. Just because you can have 30 years, doesn’t mean that you should.
Here are a couple of questions that I ask my clients when discussing their mortgage and property goals:
· When would you like to have your mortgage paid off by?
· When do you anticipate retiring?
Ask yourself these questions. Does the term of your mortgage fit with your goals? If not, what can be done about it? Or, do you have an alternative plan to pay the mortgage out?
The lenders are becoming a lot more switched on about this now, they want to know what is going to be your “exit strategy” at retirement if the loan term exceeds your planned retirement age. Options may include, but not limited to;
• Sale of an asset – This cannot be the family home, lenders do not want to see you sell the house and move into rented accommodation or in with family, they want to ensure that at the end of the day you still have your own roof over your head and no mortgage to try and pay out in retirement.
• Down-sizing – A few lenders will allow you to sell the current property at retirement to buy a smaller, less expensive property which will allow you to pay out the loan and maintain a home unencumbered.
• Superannuation – If the balance of your super is strong and the growth will mean that over the term of the loan you will end up with sufficient to pay out the loan AND enough to pay you an income, then use of superannuation is another common exit strategy.
You may not have thought about this up until this point, but the reality is that you need to start. There are some lenders now that stipulate once the end term takes you over 70 years old, you need an exit strategy in place. So if you are 40 and over and want a 30 year term, this should be a serious consideration in your planning.
If you would like some help coming up with answers to these questions, why not make an appointment with me to discuss in more detail and set your mortgage up so it is in line with your overall goals, or if you need more financial advice, one of my financial planners can contact you to discuss.