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Middle Age Mortgages

Things to consider when taking out a mortgage later in life
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Buying a ‘piece of the Rock’ can rarely have been more difficult. While the cost of purchasing a family home in Bermuda has long been high relative to most of the rest of the world, the surge in prices that came from the Covid-19 pandemic has made it even more costly.

At the same time, there has been a plunge in the inventory of available properties, prompting bidding wars for attractive homes that do come up for sale.

Add to that a steep climb in the cost of borrowing — after the US Federal Reserve tried to tame inflation by raising its influential Fed Funds rate for ten meetings in a row through May this year — and one could understand a reluctance to commit to buy now.

This convergence of events makes it even more challenging for young people to buy a property than it was pre-Covid. It should not be surprising that many of the people applying for mortgages in Bermuda are in their 40s and 50s.

Peter Goodall is very familiar with borrowers’ challenges. The founder of real estate website Property Skipper, he also operates mortgage brokerage Marston Financial. He works with lender partners to help clients find the right borrowing solution. Generally speaking, as people get older, the duration of mortgages available to them gets shorter, he said.

“Typically, in Bermuda, depending on your job, lenders will take the view that most people want to work to 65,” Mr Goodall said. “If you’re in your 20s, or early 30s, you can probably get a 30-year mortgage, but there are caveats. If you’re 45, you could get a 20-year mortgage and at 50, you could get a 15-year mortgage.”

While the shorter durations mean higher monthly repayments, older borrowers also have advantages over younger ones, such as higher incomes at a more advanced stage of their career and a greater ability to save for a down payment.

Mr Goodall stressed that borrowing is still an option at age 65 and over, particularly for those with sound finances intending to buy an investment property.

“If you’re an older person, lenders would want to take a broader look at your finances,” he said. “They would want to see that you have earning power beyond the age of 65, for example, someone running their own business, continuing to work, or with property income. They are also likely to ask for a higher down payment, perhaps about 35 percent.

“We have seen many people in their 40s and 50s buying investment properties to provide retirement income later on. If you meet the lender’s criteria, there is no reason you cannot borrow to do this after 65.”

Buying properties to rent out has become more attractive during the past 18 months, given the sharp increase in rents, driven partly by scarcity of available rentals. About 50 rentals were available on Property Skipper in June, compared to some 500 pre-Covid, representing a fall of 90 percent, Mr Goodall said.

He attributed rocketing rents to multiple factors, including the loss of hotel beds caused by the closure of the Fairmont Southampton and the Elbow Beach resort, leading to many properties being rented out short term to visitors via websites such as Airbnb. More units were lost to the long-term rental market to house ‘digital nomads’, working from the island under the Government’s Work From Bermuda certificate.

“Also, apart from a few pockets of development, such as Riddell’s Bay, there have been very few large-scale building projects since 2010, so housing supply has not increased meaningfully,” Mr Goodall added. “The Government has talked about the need to increase the working population by 5,000, but it does raise the question of where they are going to live.”

Mr Goodall’s top tip for those seeking to buy a property, was this: get preapproval from your lender. With inventory having shrunk, the ability to transact rapidly is imperative.

“We have seen clients who’ve missed out on properties because they were not preapproved,” Mr Goodall said. “The seller has gone with either a cash buyer or someone who is preapproved. It really improves your chances if you have all your ducks in a row, so you can avoid any delays.”

Even some of those who were preapproved months ago have suffered a nasty shock when they finally found a property to bid for, because the spike in rates effectively moved the goalposts for them.

“We’ve seen a shift in the market over the past year that has made the process more difficult,” Mr Goodall said. “The five-year fixed rate has gone from about 5.25 percent to about 7.5 percent, depending on the borrower’s circumstances.

“That’s created a large knock-on effect. People who were preapproved last year and were thinking they could borrow at 5.25 percent have been left confused and frustrated when they realise the rise in interest rates means they cannot afford to borrow as much as they had planned.”

Whether to opt for fixed-rate or variable is always a difficult choice for borrowers, but particularly now. Does it make sense to fix your rate for five years, if you believe rates are due to fall after a string of increases? Age and personal circumstances should heavily influence the decision, Mr Goodall suggested.

“If you’re a younger purchaser and you’ve stretched yourself to raise the deposit, your income may be rising steadily, but you may have high outgoings, such as child care,” he said. “In that situation, I would advise that you ask yourself whether you could cope with an interest-rate shock. If the answer is ‘no’, you are better fixing your rate for five years to protect yourself from rate volatility.

“If you are a bit older and your financial circumstances are different, then you may take the view that interest rates may peak and start to fall in the next 12 to 24 months — especially if you’re lucky enough to receive an annual bonus that you can use to pay down some principal — then you’re probably better to go for the variable rate.”

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