Too old for a loan?

Johannesburg – Fin24.com’s Money Clinic recently received this query: “I am over 75 and selling a house which should net me R1m.

“I am marginally overdrawn with Nedbank and applied for a loan as advertised; despite offering the unmortgaged deeds of five properties as security, the loan was refused as I was over 75.

“The bank manager would also increase my authorised overdraft. I was told there was some credit available on my Visa credit card and I would have to live on that.

“I have banked with Nedbank for 25 years. Will another bank lend me money?” the user asked.

“Although the National Credit Act does stipulate that one cannot be discriminated upon when applying for finance on grounds of race, religion, sex and age, it is the bank’s discretion to approve or decline loans,” said Uzile Gugushe, marketing officer of Ombudsman for Banking Services.

“No one can compel banks to approve or grant loans.”

Gugushe said Nedbank has a loan age limit of 63, because their minimum repayment period is 24 months.

“They do not approve loans to people who are 64 years old and older, as these persons would be turning 65 in a year’s time and would be retiring or retired.”

Absa and Standard Bank do not have an age limit for their loan applications, but they will look at the risk profile of the applicant.

Look beyond banks

“I would advise the customer to look for other banks to seek loans from, and to bear in mind that risk profile would be the determining factor.

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“I would also advise the customer that banks are not the only financial institutions that grant loans. Other non-bank financial institutions – like insurance companies – do have loan facilities, and he could contact them,” Gugushe said.

Gerrit van Heerde of Sanlam Personal Finance said Sanlam does not place any age limit on loans – but there are other criteria. One requirement of the National Credit Act is for clients to pass an affordability test, and to prove that they will be able to repay the loan.

Capitec Bank does have loans options available to people receiving a monthly pension, said Sumarie Brand of the microlender’s corporate affairs division.

“Pensioners that receive their monthly pension payment in a Capitec Bank account have more credit options than those that don’t.

“Capitec Bank offers unsecured lending and our business model provides and determines credit amounts and terms available to each individual on that specific individual credit and risk profile, as per our business model’s formula.”

In reality, few banks will be eager to lend to older people. And few pensioners will be able to pay back longer-term loans without difficulty, said Paul Rosenbrock, a director of the SA Association of Retired Persons.

In his experience, many people who retire comfortably find that after 10 years they struggle to cope financially, as medical expenses start to bite and inflation chips away at their savings.

“It is a very big problem.”

Many think that they can sell their property and use the proceeds to tide them over, but that can be uneconomical, said Rosenbrock.

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Reverse mortgage option

The cost of selling a house of R1m can run up to R250 000 if estate agent commission, moving expenses, transfer fees, bond registration costs and other charges are considered, he said.

Another option for older people is a reverse mortgage.

This involves taking a big loan with your house as security. The bank usually pays you a tax free amount, which is then subtracted (with accumulated interest) from the value of your house when it is sold.

Reverse mortgages are popular overseas because they offer pensioners hard cash, while they can stay on in their house.

Usually the reverse mortgage is only paid back when the house is sold or when the owner and his/her spouse have both died. If the amount owed on the house is more than the value of the house, it has to written off in terms of the rules of the SA Home Equity Release Protection Association (Saherpa), a consumer protection organisation. The owner’s estate can’t be liable for the shortfall.

Rosenbrock warns that reverse mortgages are only suitable to a small group of older people – ideally substantially older than 65, “who are property rich and cash flow poor”.

An example would be an 80-odd-year old who gets about 30% of the value of a R1m house in cash. Interest of, say, 12.5% is levied on the loan. After 12 years, when the owner and his spouse have both died, the loan amount has run up to R1.334m.

Consider the pros and cons

If the value of the house increased by 3% a year, the home will then be worth R1.425m and the difference (R91 645) will go to the estate of the owner.

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If the property value doesn’t increase at all over the 12 years, the bank will have to write off R47 000 in terms of Saherpa rules.

The big advantage is that the struggling pensioner will get a cash injection, which can be used to buy a life annuity with a monthly payout or settle urgent medical bills.

But the drawbacks are significant, and it should be regarded as a loan of last resort. Interest is usually about 2% above the prime rate and the costs – which can include mortgage registration and professional property valuation fees – are substantial. There is also very little regulation governing the products.

While reverse mortgages were first launched some 90 years ago in the US and are established in many countries, the concept has not gained much traction in SA.

The big banks have reportedly considered reverse mortgages, but only Nedbank initially introduced a product to the market which it ultimately decided to withdraw.

While a number of smaller institutions are offering reverse mortgages, only Seniors’ Finance, owned by Alexander Forbes and the New Zealand-based Seniors Money International, is accredited by Saherpa.

Older people in particular have to consult an independent financial adviser before making decisions, said Rosenbrock.

– Fin24.com