Q. My wife & I are in the late 50’s with fixed passive income of $50,000 pa from the sale of a business until 2016. We have $300,000 in bank deposits, $60,000 in Managed investments. We have a guaranteed annuity income of $42,000 for life from an overseas Pension from age 65. No debt, currently renting a house for $450 per week. Should we purchase a home or enjoy life ? Would a bank finance any home purchase without us having a ‘job’?
A. Whether to purchase a home or continue to rent will be governed by two key criteria. How much income you need in retirement and how much a property will cost to buy in the area you plan to live.
Once you have a clear understanding of your income needs, you will then be in a position to determine how much of your savings you will be able to allocate to a home purchase. Please be aware the income on the overseas Pension will likely be taxable income in Australia so please be mindful of this and ensure you are declaring the income received correctly.
Without knowing your specific income needs, you cannot calculate how much you need to commit to servicing a debt. If we assume that your living expenses were around $40,000 a year, you would have $360,000 in investments and $150,000 in the Vendor finance loan you have extended. Accordingly you could buying a home with a deposit of around $340,000 and service a debt to a level you are comfortable with. If your living expenses were substantially more, this will impact your ability to service a debt and accordingly compromise how much you can afford to spend on a home.
If you have insufficient savings to buy a property in the area you plan to live in, you would need to seriously consider the cost of renting versus the cost of a mortgage. A bank cannot discriminate against lending you money on the basis of age. Their criteria for lending will be determined by how much you need to borrow and how you demonstrate your ability to service the debt and over what time period. Banks will treat Guaranteed Lifetime Annuities as income for serviceability purposes. However they will still want to ensure the loan can be repaid in your lifetime and will set terms accordingly.
If you decide not to buy you should invest your funds as tax effectively as possible for the long term. Given you are under age 65, I would strongly encourage you to use the Superannuation system to your advantage. Up until age 65, you are eligible to make contributions to Superannuation without satisfying a work test. You are able to contribute $150,000 p.a each as a personal contribution or $450,000 each 3 years until 65. Income received from an Allocated Pension post 60 is tax free and carries tax advantages from age 55 to 60.
Whether you buy a home or not, it is likely you will qualify into the future for the Age Pension.
Before embarking on a course of action, please get advice to make sure you are aware of the consequences of making either decision.