Planning ahead to secure your dream retirement home

Retirees seeking to buy a home may face major hurdles or downright rejection from home loan providers.

This is according to Renier Kriek, Managing Director of innovative home loan provider, Sentinel Homes. “Banks and other lenders are reluctant to offer home loans to retirees because of a higher risk of delinquency,” he says.

Of course, the richer you are and the more assets you own, the higher your chances of success. For everyone else, what are the obstacles and what options are available to such buyers?

The 75 rule
Most home loan providers operate on the rule that a home loan must be fully repaid before an applicant turns 75. That means you should apply for one before 55 or you’ll have to accept a reduced term.

For example, a retiree who is 65 will only be granted a 10-year loan, resulting in much higher monthly instalments that could prove unaffordable.

“You’ll end up paying 75% more per month than if you were, say, in your 40s,” says Kriek.

Affordability
Also, banks generally don’t fund retirees who only have pension income. Applicants will be subjected to rigorous affordability checks to prove they have stable active or passive income from an occupation or investments. This ensures they are able to service the higher monthly instalments over the shorter term.

Planning ahead
Retirees have a much harder time getting a home loan, if at all. To secure affordable terms, one really needs to apply before 50, so planning should start well before that.

“You have to think about how you are going to qualify for and service the debt when you either don’t want to or cannot work anymore,” says Kriek.

Available options
Several options can help you fund housing in your old age, either before or during retirement, and each has its pros and cons.

• Decide to rent. Although renting is an option, many landlords won’t take on retiree tenants because, if they become delinquent, South Africa’s restrictive rental laws make it almost impossible to evict the elderly.
• Use your pension after retiring. You can use a portion of your pension to pay the deposit and instalments on a home loan. However, this impacts your ability to service ongoing property expenses and your lifestyle over the long term. Withdrawals from pension capital may also come with tax implications.
• Cash out your pension. Once a viable option, the current two-pot scheme makes this much harder because withdrawals are restricted to the amount held in your savings pot. In addition, withdrawals are taxed on the spot at your highest marginal rate, resulting in a significant loss of up to 45% of the withdrawn amount.
• Get a pension-backed loan. Larger financial services providers and funds may offer pension-backed home loan schemes that are secured by your pension fund savings. If you become delinquent, however, you put your only source of retirement income at risk.
• Buy a life right. Much cheaper than buying a retirement home outright, a life right allows you to live in a retirement village home until death. The downside is that the property is not part of your estate, and the purchase must be made in cash as banks will not fund it.
• Alternative home loan providers. An instalment sales purchase, like that offered by Sentinel Homes, means you won’t own the property until you pay off the loan in full. Retired or elderly applicants may be required to pay a higher-than-average deposit and will be required to prove a diversified set of income sources, but the mechanism proves more flexible for elderly buyers.

Retiring sensibly
Adopting a retirement outlook ahead of time is critical. People naturally avoid thoughts of mortality, but we must plan for the day we may be too old to cope in our current home. Then, it becomes necessary to buy a more affordable property, especially one close to frail-care facilities.

“You need to face reality and prepare yourself for that eventuality, including where you will live and how you will fund that all important purchase, especially since mortgage lenders likely won’t help when you arrive at retirement,” says Kriek.

ENDS