Borrowing to buy a retirement home works best when you plan the loan around your future income, not your current pay packet.
If you are a few years from retiring, or already there, the rules of the game shift a little. Lenders look closely at how you will repay the loan once the wage stops. This guide covers the mistakes we would nudge you away from if we were chatting over a cuppa.
Can You Get a Home Loan When You Are Close to Retirement?
Yes, you can apply for a home loan close to retirement, but the lender will want to see how you will repay it on your retirement income. Lenders assess each application on its own merits, and the details differ between them.
That usually means lenders look at income such as super and part-pension income, and at assets such as investments. Some lenders may consider a planned downsize or sale, but many do not accept the sale of your own home as an exit strategy. Any such plan is subject to lender policy and serviceability, so confirm it with the lender or a broker. It also pays to compare home loan options before you commit to one lender.
Mistake One: Leaving the Exit Plan Until Later
A clear plan for how the loan ends is the most useful thing you can bring to a lender. It also protects you, because a loan with no end date can become a worry later.
Consider a couple in Adelaide who plan to downsize in two years. They want to sell the family home and buy something smaller and easier to look after. They haven't sold yet, so they would need to carry both properties for a short while.
In a scenario like this, a broker might look at a short-term loan for the new home, sized so that the sale of the old home pays most of it back. This structure depends on the lender approving it and assessing serviceability on both properties, and many lenders do not accept the sale of your own home as repayment. Say they borrow $400,000 at an illustrative 6.75% p.a. Interest alone would be about $27,000 a year, or roughly $2,250 a month. That figure covers only the new loan's interest. It excludes repayments on any existing loan, stamp duty and selling costs. The trade-off is that if the old home takes longer to sell, they keep paying that interest, and a lower sale price could leave a balance to carry.
This is a hypothetical illustration, not a guaranteed result. It shows why having a backup plan if the sale drags on is more comfortable than guessing.
Principal and Interest or Interest Only for a Retirement Purchase?
Principal and interest repays the loan over time, while interest only keeps repayments lower for a set period but does not reduce the balance. For most retirement buyers, principal and interest is the safer base because the debt shrinks.
Interest only can suit a short bridge, like the couple above, but it has a cost. You pay interest on the full amount for the whole period, and when it ends, repayments rise because the same balance must be repaid over a shorter remaining term. If you are relying on a future sale or lump sum to clear the debt, make sure that plan can survive a delay.
Do Fixed or Variable Rates Suit Retirees Better?
Neither is right for everyone. A variable rate can move up or down, while a fixed rate gives certainty for a set period but can limit extra repayments and may involve break costs if you leave early.
If you live on a set income, knowing your repayment can bring peace of mind. If you expect to sell or pay the loan down with a lump sum soon, flexibility may matter more. A split rate, where part of the loan is fixed and part is variable, is one way to balance both, though it means managing two sets of terms.
Use a Mortgage Offset to Park Your Savings
A linked offset account reduces the interest charged by counting your savings against your loan balance. Your money stays accessible, which suits retirees who like to keep a buffer for medical costs, travel or home repairs.
The trade-off is that loans with an offset sometimes carry a higher rate or an annual package fee, so it is worth comparing the full cost. An offset tends to be most useful when you hold meaningful savings in it. For smaller balances, a cheaper loan without the feature might work out ahead. A broker can run those numbers for you.
Mistake Two: Forgetting the Costs on Top of the Loan
The loan is only one part of the cost of buying. Stamp duty, legal fees, and moving costs all add up, and they are paid on top of your deposit.
In South Australia, the duty on property transfers is called stamp duty, and the amount depends on the purchase price. Check the current figure with RevenueSA, or ask us to include it in your numbers. If your deposit is smaller than 20% of the purchase price, the lender may also charge Lenders Mortgage Insurance (LMI). That is a cost you can avoid by lifting the deposit, which is easier when you are selling a long-held home.
Should You Refinance Instead of Buying?
If you already own your home and like where you live, refinancing or releasing equity might do the job without a move. It depends on what you want from your retirement home, whether that is less maintenance, being closer to family, or a different layout.
If you are weighing up the choice, it is worth a look at refinancing alongside buying. Buying brings stamp duty and moving costs, while refinancing keeps you where you are but may add to your loan balance. Neither choice is wrong, but one will usually fit your goals better.
Get Pre-Approval Before You Fall in Love With a Home
Home loan pre-approval gives you a clear idea of what a lender may let you borrow before you start inspecting. It is not a final offer, and it can lapse or change if your circumstances shift.
That is useful if you are buying before selling, because it helps you set a realistic budget. As an MFAA Accredited Mortgage Broker with nearly 20 years' experience, Susi Ross at SR Finance can talk through your situation and arrange pre-approval with lenders from across Australia that suit your retirement plans. If you are helping a family member into their first place at the same time, our first home buyers page may be handy too.
Ready to plan your retirement move? Call Susi for a chat or book a face-to-face appointment at a time that works for you.
