Cash or equity, that is the question
With the political focus well and truly fixated on getting first-home buyers onto the property ladder, it’s worth a reminder that mortgage stress is rife in every age bracket.
Recent research from second-tier lender AMP Bank discovered that nine out of 10 Australians over 50 believe they will be paying off a mortgage in retirement.
According to AMP’s director of lending and everyday banking Michael Christofides, the soaring cost of living and the prospect of running out of cash are the two main concerns for people heading into retirement.
Unlocking cash flow, stability and certainly is therefore of paramount concern for these homeowners. Brokers are therefore encouraged to get a firm grip on the best ways to guide retirees and near-retirees through the next stage in their lives.
Cash or equity?
While paying off principal and interest is a sure-fire way to get rid of mortgage debt quicker, not all retirement-age homeowners care about building equity.
Others want more cash in hand to pursue the lifestyle of leisure they’ve spent their whole lives working towards. As such, they’re looking for mortgage products to better suit their needs.
Here’s where an interest-only home loan comes into play.
“If a customer is nearing retirement and wants to have a little bit extra cash flow for travel or to enhance their lifestyle – or even if they have some big one-off expenses – then an interest-only period on that home loan might make a lot of sense for them,” said Christofides.
An interest-only structure is naturally cheaper since there is no principal to worry about. It is particularly enticing for customers who intend to sell their property at some point in retirement and live off their existing equity.
“It's really about giving customers flexibility. It's really about giving them additional cash flow to help manage their lifestyle needs, particularly as they're near retirement,” Christofides said.
Just how worse off are we?
Generational in-fighting would have you believe that the older generations have reaped the rewards of a buoyant housing market, only to pull the ladder up for Millennials and beyond.
But soaring living costs have shown no prejudice in who they affect.
According to data from the ABS database, average household debt levels have quadrupled over the past 20 years. For Australians aged 55 and over, that's gone from $62,000 in 2003-2004 to $242,000 in 2021-2022.
“That's an indication of the fact that older Australians are taking in more debt into retirement and that has been contributed by the higher cost of living. It's also been contributed by rising house prices as well,” Christofides said of the data.
“That means there are really mounting pressures for older Australians to pay off their mortgage.”
In fairness, rising debt levels among the older cohort could also suggest they are simply more confident of their finances and wealth, therefore more confident about taking out larger loans.
That was a suggestion put forward in the 2020 Retirement Income Review, which added that rising superannuation wealth has further bolstered households’ confidence.
However, increasing indebtedness also increases the likelihood of labour market participation, “meaning households with mortgage debt at older ages are more likely to continue working,” the report said.
It continued: “Older owner-occupied households with mortgage debt are more vulnerable to negative economic and market shocks, especially if they retire. Declines in income or asset values could impede their ability to service mortgage repayments and push some households into financial hardship.”
That financial hardship can often be alleviated through refinancing, interest only or otherwise.
The broker role
One thing is for sure: Brokers play an essential role in guiding early retirees, whichever strategy they end up taking.
“Seventy-five percent of all new mortgages are written by a broker,” Christofides said. “Brokers have done a great job supporting customers with their mortgage needs and we know that they provide expertise for customers who are trying to work out the right strategy for them.
“A broker can absolutely help a customer work through which home loan is right for them depending on their needs.”
For AMP’s part, it is targeting retirees and near-retirees with a new 10-year interest-only home loan, built specifically for cash flow purposes. As a sweetener, there is no mid-term reassessment baked into the loan; an uncommon feature for products of this ilk.
According to Christofides, having a 10-year interest-only period without an assessment caveat “provides that additional flexibility, that additional control and additional cash flow in retirement (that) can really smooth out some of those pressures that retirees are feeling today.”
