What are boomer home loans, and how do they work?

Rising interest rates have rapidly priced many Australians out of easy home ownership. But the conversation tends to leave out a generation expected to have it all: Boomers. 

Born between 1946 – 1964, “Baby Boomers” make up 21.5% of the Australian population (according to the latest Census) and generally have the highest rates of home ownership. However, it’s not a universal rule, and many older Australians have unique borrowing needs not catered to by traditional lenders.

So what options do senior Australians have for home loans? Let’s dive in.

Boomer-style home loans are mortgages designed specifically for older Australians. While age is just a number, senior citizens have different needs than younger Aussies when it comes to financing a home – and a few unique obstacles, too.

For instance, Boomers tend to already have an owner-occupied home which they either own outright or partially through an existing mortgage. This means they’re dealing with a greater amount of home equity than younger buyers, which they can leverage as a unique income stream or source of wealth. But it also means they still have debt to deal with – and not many years of working life left.

Because of this, banks often see older borrowers as a risky investment and slap them with higher interest rates, especially if they try to refinance close to retirement. With wages stagnating and many Boomers aged out of jobs with competitive salaries, this can sometimes present a genuine issue for affordability, especially for women, people of colour, and younger Boomers who haven’t yet broken into the property market.

Generally, Boomers have two goals when it comes to home loans: clearing mortgage debt and taking advantage of their equity. Here’s how.

Clearing mortgage debt

For those thinking of retiring, it’s important to pay off the remainder of their mortgage in a timely manner. This eases their debt and expense burden so they can enjoy a comfortable post-work lifestyle. 

If your mortgage repayments have become too steep, or you would like to accelerate your repayment timeline, it’s critical to compare options out there that offer:

• Low interest rates
  
• Free extra repayments
  
• Redraw facility
  
• Offset accounts.
  

These features can provide strategies for saving on interest and time, especially if you find an offer suited to your needs and budget. Boomers may also have to search for smaller lenders, like credit unions and mutual banks, to find deals catering to them. (Be aware of any hidden fees or hoops you may have to jump through when discharging your mortgage, too).

Another option to consider is a debt consolidation loan, which combines all your existing debts (credits cards, personal loans, mortgages) into one secured loan. This can come with a slew of catches, however, and can potentially put you deeper into debt than when you started. Always talk to a financial advisor first before pouncing on a deal that may be too good to be true.

Using home equity to your advantage

Owning property can be a significant source of wealth. In specific circumstances, Boomers can also use their home’s value, or ‘equity’, as a source of funds or income. How? There are several methods.

The first is through a reverse mortgage, which is a type of loan that uses your property as a security in exchange for a lump sum, ongoing payment, or line of credit. Older homeowners with considerable equity built up (like those who benefited from the 2021 property boom) can take out a reverse mortgage as a way to supplement their retirement income. 

This has become an increasingly popular option in recent years, though all of the big lenders have withdrawn from the reverse mortgage game for now. Those hoping to compare options will be better served with smaller lenders – though beware falling into the trap of negative equity, i.e. borrowing more than your home is worth.

This is mostly a problem if you’re not done paying off your mortgage or if you plan to sell, but if you’re considering taking out a reverse mortgage, look for loans secured with the No Negative Equity Guarantee so you don’t get in over your head.

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Another option is to use your home’s equity as a source of funds for investments like property, shares, or even travelling abroad. Typically, banks will unlock a maximum of 80% of your property’s value, minus whatever you owe them, for you to use as capital, but this can still be a significant source of money.

For instance, say you own a property worth $1 million and owe $300,000 left on your principal balance. Your bank would cap you at 80% of your home’s value ($800,000) minus what you owe (-$300,000), leaving you with $500,000 worth of unlockable equity. 

A housing deposit this size could allow you to borrow up to $2 million for an investment property, which can be a serious game changer for the property markets like those in Australia’s capital cities. Just keep in mind you’ll also have to budget for other costs associated with buying property, like government stamp duty.

Like all financial products, boomer home loans come with risks and rewards. For instance, if you take out a reverse mortgage…

Pros:

• New income source in retirement.
  
• Repayments are typically flexible.
  
• Variable interest rates.
  
• Use equity to your advantage.
  

Cons:

• Still a form of debt.
  
• Not available to everyone (age limits usually apply).
  
• Variable interest rates.
  
• Reduces your equity.
  

The best boomer home loan for you will ultimately depend on your needs and circumstances. Late in life financial decisions can have a large impact on your retirement, so it’s vital to seek professional financial advice so you fully understand the risks and tax implications of any strategy.

After all, if anyone deserves to make the most of their home – and keep it safe and sound – it’s golden oldies.

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