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Why do I need a home loan exit strategy?

Why do I need a home loan exit strategy?

If things don’t turn out the way you expect, you may need another way to pay off your home loan. That’s why lenders often ask for a home loan exit strategy.

When assessing your home loan application, lenders will try to confirm that you can pay back the loan over the course you select. However, loan terms can be twenty to thirty years, and in some cases, they could run well into your retirement years.

For this reason, you may sometimes need to submit an exit strategy for your home loan. This will require listing any other sources of income that can help you repay the loan once you’re no longer employed. It’s particularly recommended for borrowers over the age of 50. Consider asking your lender for home loan exit strategy examples if there’s any confusion.

What does a home loan exit strategy look like?

Your home loan application may include some questions about your exit strategy, such as a request for information about other assets or investments. 

If not, you supply some extra information to help your lender, such as a letter with your application listing any additional income that can help you repay the loan if Plan A doesn’t work out. You can check with your lender about the alternative sources of income that they consider acceptable. This can include your super funds and any shares you own or property you’ve purchased as an investment. Most lenders won’t accept selling the home for which you’re taking the loan as a potential exit strategy. 

You can also discuss your financial circumstances and plans in your home loan exit strategy. For instance, you may already know of income opportunities that you can take up after your retirement. On the other hand, you may plan to reduce the term of your home loan or apply for a reverse mortgage when approaching retirement, to make sure that the loan is repaid by then. 

Since some of these measures such as selling a rental property or shares may require moving your money or turning assets into cash, it may be worth consulting a financial advisor or a mortgage broker before finalising your exit strategy.

What other factors do I need to consider when preparing an exit strategy for my home loan? 

Some people think of their home loan exit strategy in the same way as they think about preparing for retirement. They’d like to be as equipped as possible for their later years to reduce potential stress. This may mean having multiple plans for paying down debt.

For some, this may mean checking whether the loan can be repaid early, before retirement. This would make the exit strategy redundant.

Others think about what they may need for retirement and whether the family home still suits that plan. For instance, they could sell the home to buy a smaller place. This is commonly referred to as downsizing, but all lenders will accept this as a feasible exit strategy. Lenders who accept downsizing as a strategy could also ask for information about the other home as it may not be much cheaper when exit costs are taken into account.

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This article was reviewed by Kate Cowling before it was published as part of RateCity's Fact Check process.

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