Taking a loan in your golden years

Banks might be reluctant to lend to retirees but there are ways to increase your chances of getting a loan

For retirees, the best practice is to live on cash. Says Ng Chee Yong, a licensed financial planner at the financial care centre of wealth solutions provider CWA, “Whenever possible, pay with cash. A loan is taken to finance items that you cannot afford, a situation that retirees without a steady income should avoid.”

Nevertheless, unforeseen events or emergencies may compel you to borrow. For instance, an offspring may face financial difficulties and most parents would find it difficult to deny assistance. Or you might want to start a business or invest in properties. “After retiring at 55, many retirees start small businesses.

It is not surprising to find them applying for business or personal loans,” says Thoo Mee Ling, head of secured lending at OCBC Bank (M) Bhd. “Apart from that, those who are active in the property market will continue to buy and sell. They need to turn to banks for home loans.”

Louis Loh, business development manager at VKA Wealth Planners Sdn Bhd, says most of his retired clients take loans to buy new cars or refinance their homes.

“Some retirees may prefer to get a loan when purchasing big-ticket items although they can afford them. They think that they will be audited by the Inland Revenue Board if the items are paid in cash.”

Generally, financial institutions deny loans to those who are not earning an income. However, you can obtain a loan in certain situations, especially if you have planned for it. Here are six tips to maximise your chances of getting a loan in your golden years.

1 Take the loan  before you turn 60

Each financial institution implements and adheres to a set of lending guidelines. “The guidelines are essential for the bank to manage its risk and returns. These guidelines include risk criteria set out by regulatory bodies such as Bank Negara Malaysia. Age [of borrowers] is a variable that a bank controls through its lending guidelines,” says Thoo.   “If you think that you might want to get a loan during retirement, it is best to take the loan before you turn 60. The most ideal time is between 50 and 55,” says Loh.

2 Cut margin of finance and/or loan tenure

“Nowadays, some financial institutions prefer to give out lower margins of finance because they want to decrease their non-performing loans. Generally, banks will give loans to retirees who ask for a 50% margin of finance,” says Loh.
“If you are 56 and want to get a 15-year loan, the financial institutions may be concerned. But, if you want to get an eight- or 10-year loan, they are more comfortable with it. In addition, this lowers your borrowing cost,” says Ng.

Loh observes that it is far easier for retirees to obtain car loans, which have short tenures of two to five years, rather than home loans. “Note that most financial institutions are reluctant to give out loans to retirees over 60 even if they have repayment capacity or are willing to cut the loan tenure.”

3 Document your  sources of income

One of the most important aspects of getting your loan approved is your repayment capacity. “Your income [finances] must be able to prove that you can,” says Loh.
“Make your income ‘official’. For instance, if you sell cakes or babysit, legalise your business by setting up a sole proprietorship. This will need few months of planning,” suggests Ng.

If you are going to use rental income to support your loan application, provide proper documentation. “Get your tenancy agreement stamped and keep all records of payments. Get the tenant to bank the rent into your account,” says Ng. Besides receiving a continuous stream of income from these assets, Loh adds that your chances of obtaining a loan will improve if your existing properties are fully paid up.

But, bear in mind that financial institutions only consider income that is consistent and secured. “Lenders generally do not favour lending to insurance agents, unit trust agents, direct-selling marketers, remisiers or brokers. This is because their incomes are based on renewal of sales and the lenders assume that such income will not last for a long time, unless they have a group of people to continue running their business,” observes Loh.

Therefore, it is essential to build up a sizeable passive income stream prior to your retirement. Passive income can be generated from rental, dividends from shares, bonds and unit trusts, or commissions. “[Passive income] complements our pension fund and supports our repayment capacity,” says Thoo.

4 Get a guarantor or  joint borrower
Generally, financial institutions prefer to give loans to retirees who have a guarantor or joint borrower. “By guaranteeing the loan, the guarantor or joint borrower, usually a family member, is legally liable for the repayments as well,” says Thoo.

Loh observes that financial institutions prefer a joint borrower to a guarantor. “This is because a joint borrower is seen as having more commitment than a guarantor. However, where the joint borrower has a high debt-asset ratio, the financial institution may consider him as a guarantor instead.”

If you ask an income-earning family member to support your loan application, document the agreement. “You need to put everything in black and white. Inform those involved and communicate your plans,” says Ng.

If you are taking a mortgage loan, determine if the joint borrower will co-own your property. If not, this arrangement is tricky and can affect your estate. Also, note that the joint borrower or guarantor will have to continue servicing the loan should you pass away. “If the loan is not insured, your child will be burdened if you pass away while servicing the loan. The debt will not stop when you die, but will pass on to your legal beneficiaries,” says Loh.

5 Pledge collaterals

Collateral such as fixed deposits, unit trusts and shares can be pledged when applying for a loan. “As a rule of thumb, fixed deposits are favoured because they are liquid assets. Most banks, if not all, will offer a 100% loan if it is collateralised by a fixed deposit. Unit trusts and shares can be offered as well, although the margin of finance varies, depending on the bank’s risk appetite,” says Thoo.

If you pledge your fixed deposit, you cannot use the funds in the account throughout the tenure of the loan, says Loh. “Usually, banks will ask for a RM20,000 fixed deposit or a sum equivalent to 10% of the property’s value. This is the minimum amount needed to auction off the property if the borrower defaults.”

Financial institutions typically do not ask for property as collateral for a personal loan. “They are not in the business of liquidating such assets,” says Ng. The bank will incur a cost in holding a property auction and the price of the property will usually be lower than the market rate, explains Loh.

6 Stick to the same bank

Where possible, build a relationship with your banker. “If you have a good relationship with your banker, it might be easier for you to get a loan. For instance, if you always get your loans from the same bank, it might be more lenient and go the extra mile for you,” observes Ng.