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Financial Adviser | Why lenders erect age barriers for loans

Published:Sunday | August 23, 2015 | 8:00 AM

QUESTION: Recently, I spoke to a JNBS loan representative about a loan to purchase a lot of land. She sent me an email listing the documents needed to proceed. I complied, but later received a call from her saying the documents looked good but because I will be 70 years old this year, I did not qualify.

She further stated that in Jamaica they stop lending money to people reaching 70 and over. Could you comment on the statement?

- Linford

FINANCIAL ADVISER: Financial institutions want to be satisfied that they will recover the money they lend. They tend to place ability to repay high on their list of requirements. Generally, they link ability to repay the borrowed funds with income, but age also features as an important factor.

Building societies are not the only financial institutions that lend money for mortgages. Commercial banks and credit unions also do, and there is a remarkable similarity in their approaches to this line of business.

Generally, they require that mortgagors repay their loans by the time they are 65, that being generally accepted as the retirement age - the age at which employment income stops and pension begins.

The term of a mortgage thus depends on the age of the borrower - the younger the borrower, the longer the term. The maximum term is generally 30 years, but it is as high as 40 in some cases.

Generally, pension is less than salary and it is well known that most Jamaicans have no formal pension arrangement in place. Mortgage lenders thus limit the age at which they grant mortgages because they want to be comforted that the borrower is earning at a rate sufficient to repay the loan for its full duration.

The norm is for the minimum term of a mortgage to be five years, so it would not be easy to secure mortgage financing after age 60. But there are two situations in which borrowers may be able to borrow with a term long enough to go beyond the retirement age.

JOINT MORTGAGES

Joint mortgages offer one such opening, but both applicants would also have to be joint owners of the property. Generally, in such cases, the term of the loan is determined by the age of the younger applicant, who should be able to contribute significantly to the servicing of the debt and, therefore, would be required to provide satisfactory proof of income.

This is so because the lender needs to be satisfied that that person can make the required payments in the event of the death of the older applicant. Insurance on the life of the applicant would be a superb hedge against this event.

In the other case, applicants may succeed in getting a loan, the repayment of which will extend beyond the age ceiling if they can establish their ability to make the required payments beyond the formal retirement age.

Self-employed persons and persons with other forms of income, such as income from a business, could make a successful case by providing concrete evidence of such income. One commercial bank requires proof of tax compliance, verification of income by an accountant, and bank statements for one year - to provide proof of good, traceable cash flow.

The policy of setting the end of a mortgage loan to match the end of the generally accepted end of the useful working lives of individuals is a risk-management issue. Financial institutions are keen to collect when they lend, and the shorter the term of the loan, the higher the monthly payments.

They recognise that the risk of applicants not being able to make higher monthly payments from reduced incomes is high. This weighs heavily against older persons.

I doubt that the present policy will see any meaningful change.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com.