If you think 25 or 30 years is a long time to take paying off your home, how about 40?
That’s right, a handful of lenders will let some borrowers take up to 40 years to pay off their mortgage.
Financial product comparison website RateCity says there are half a dozen lenders on its database that offer 40-year home loan terms.
Four are customer-owned credit unions or mutual banks, which fall under the supervision of banking regulator APRA because they take deposits, while the other two are among the larger non-bank lenders.
None of the major banks offer these 40-year maximum loan terms, nor is it a growing trend in Australia, but some first-home buyers are turning to these loans as they try and get a foothold in property markets that remain expensive, despite recent price falls.
“Unsurprisingly, 40-year mortgages are targeted at first-home buyers who have time on their side to pay down their debt, but don’t quite have the serviceability power to successfully get a 30-year home loan application over the line,” RateCity’s research director Sally Tindall said.
The “serviceability power” that Ms Tindall is talking about is whether the borrower can comfortably afford their monthly repayments.
When a mortgage is spread over a longer term, those monthly repayments are smaller than they would be on a shorter term, making them more affordable.
But, as Andy Kollmorgen, the investigations editor at consumer group Choice, points out, this affordability comes at a long-term cost.
“The longer the loan, the lower the monthly payments, so stretching your mortgage out over 40 years may just put a home loan within the range of affordability,” he said.
“But, of course, the converse is also true: The longer the loan, the more interest you pay in the long run.
“You would pay almost double the interest – or hundreds of thousands dollars more – with a 40-year loan as compared to a 25-year loan. So the advantage ultimately goes to the lender.”
Ms Tindall agrees.
The total interest paid is much higher because it takes 10 years longer to pay down the debt, so the bank gets to charge interest for an extra decade,’’ she said.
That is illustrated in this example from RateCity, which looks at a $400,000 principal and interest loan.
|$400,000 home loan (paying principal and interest)||Interest rate 4%||Interest rate 5%|
|Monthly repayments — 30 years||$1910||$2147|
|Monthly repayments — 40 years||$1672||$1929|
|Total repayments — 30 years||$687,478||$773,021|
|Total repayments — 40 years||$802,440||$925,814|
In short, a longer loan term means lower monthly, fortnightly or weekly repayments now, but higher total repayments by the time you pay off the loan.
Australian banks shy away from 40-year loans
Given that the bank ends up making more money from the loan, you would think that more of them would be offering 40-year mortgages.
That is the case in the UK, where the Financial Times recently reported that more than half of all mortgage products on the market could be extended beyond the standard 25-year term up to as much as 40 years.
However, RateCity says this product is viewed as risky by APRA and by many institutions, because 40 years is almost all of an average working life, meaning many people who take out these products could end up retiring before they finish paying off their mortgage.
“Forty-year mortgages were once heralded as an emerging alternative to the standard 30-year loan term, but in recent years the number of lenders willing to offer them has dropped significantly,” Ms Tindall said.
“RateCity.com.au data shows that in 2012, there were dozens of loans offering 40-year terms. Today, there’s only a small handful of lenders willing to offer 40-year mortgages.
Forty years is almost half the average adult life, so it’s no wonder banks are nervous about offering such long-term products.’’
TM Bank, which is owned by its customers, has been offering 40-year home loans for a dozen years, available exclusively to first-home buyers.
It says it offers the longer maximum loan term to assist first-home buyers into the market.
“It is important to note two things,” TM Bank told ABC News.
“That the term is not a flat 40 years, but up to 40 years; and that borrowers are not expected to stay in the product for 40 years, but to transition out into another mortgage product as their income or equity progresses.”
TM Bank also said it informed customers taking out the longer-term loans that their total repayments would end up being higher if they do not end up paying off the loan early or refinance to a shorter term.
“As part of our responsible lending obligations, the bank is required to ensure that potential borrowers are aware of costs and risks associated with the product or products for which they are applying,” it said.
“This includes the impact of additional interest by taking out a longer loan term, as well as other things like the impact of total interest charged on an interest-only loan or restrictions and break costs applicable on a fixed-rate loan.”
Some 30-year loans turn into 40-year loans
Ms Tindall said some borrowers with more standard 30-year mortgages found themselves taking up to 40 years to pay off their loan because they had refinanced their original loan several years into its term into another 30-year mortgage.
For people looking for a bit of financial breathing space, it can be an attractive proposal, but it comes with a costly catch,’’ she said.
“Even if they refinance to a lower rate, they could still pay thousands of dollars in extra interest by adding another five or 10 years to their home loan term.”
Mr Kollmorgen urges borrowers to bear in mind that a lot can change over 40 years, both economically and in their personal circumstances.
“Today’s historically low interest rates can go nowhere but up in the years to come, which would mean your home loan payments will also go up,” he said.
“We recommend factoring in a hypothetical 3 per cent interest rate rise and doing an affordability check on that basis as a household budget stress test.
“And make sure your income is secure and reliable for the foreseeable future.”