OPINION: New lending regulations that require banks to scrutinize your statements with a fine tooth comb and assess what you spend on Uber Eats and Netflix might sound a bit critical (and they are).
This judgment affects how much people with good incomes and strong equity positions can borrow.
The solution to make banks less judgmental is quite simple, but not always easy: demonstrate good financial management by cleaning up your act for at least three months, to show the bank proof of regular savings and financial discipline. If you are a spendthrift or have never done this before, it can be difficult.
What is not such an easy solution is the impact of the legislation (the amendment on credit agreements and consumer finance) on older borrowers – those over 50.
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Even tidy bank statements or a huge equity in your home won’t change the unassailable fact as you get older.
Banks have always been more wary of older borrowers, but never more so than they are today.
Rules that require the bank to prove a borrower’s ability to repay and repay a loan become more difficult to meet when that borrower falls within 10 or sometimes 15 years of retirement age.
Whether or not you intend to retire at 65 seems irrelevant – banks take into account whether you will choose or need to reduce your hours and therefore your income on that date.
This is often when you are suddenly faced with the fact that you only have a dozen summers left in your working life and your retirement savings are so gaping that you are looking to leverage for it. help fill it.
You are often at the top of your earning potential, arguably the richest, and yet all of a sudden the bank starts to view you less favorably. It might sound insulting – (because it kinda is!)
As banks tend to want any mortgage to be paid off by 70% at the latest, this forces the default loan term to be shorter and repayments higher, which then impacts your cash flow – often at times. point where the bank says no.
The frustration here is that if you are investing in a property, chances are you never intended to pay off the loan before you sold it – but the banks ignore that. It is also likely that the rent from the property will help pay the mortgage. – but they also tend to rule out this hypothesis.
So how do you solve the problem? Obviously, there are a number of other alternatives to closing your retirement gap – like earning more, spending less, or working longer – although I find that when I suggest these options to clients, they arouse little appetite. .
When banks aren’t playing ball, you can often find more flexible loan terms offered by non-bank lenders.
They get a bad rap because they charge higher interest rates but, provided you are a good candidate, the rates can be only 0.5 to 1 percentage point higher. The upside is that the loan terms are usually much more favorable – valuing your loan repayment at age 80 instead of 70 and offering longer interest terms. For this reason, a non-bank workaround may prove to be more beneficial in your later years, despite the interest rate differential.
When deciding which loan product (or any financial product for that matter) is best for you, you must first understand what the problem you are trying to solve is the starting point for determining the right strategy. .
In this case, the problem you are trying to solve is what leverage can I access to help pay for my retirement, when the bank is unwilling to lend me? By solving that you need to know that the loan terms are not going to kill you i.e. you can afford the repayments no matter what, taking into account the interest rates, the term and whether or not you pay the principal. But be clear on your strategy before weighing your options. Whether the solution is a little unorthodox is not the question – the important thing is that you were successful in solving the problem.
Hannah McQueen is a financial advisor, chartered accountant, personal finance author and founder of enable.me – financial strategy and coaching.