Extra-long loan terms could be a reluctant but necessary choice for mortgage holders battling against massive monthly repayments, according to new research.
One in three Australians say they would consider a “mega mortgage” with a 40-year term to reduce their repayments – but experts have warned this could cost hundreds of thousands more in interest.
Comparison site Finder surveyed over 1000 Australians and 30 per cent admitted they would take on a 40-year loan if it reduced their mortgage repayments to an affordable level.
This is the equivalent of 6.2 million Australians considering adding on a decade to the life of their home loan.
Only four lenders offer 40-year mortgages in Australia – all exclusively to first-home buyers.
The standard home loan today has a 30-year term and Finder’s head of consumer research Graham Cooke said adding a decade to your loan could be a huge financial misstep.
“While 40-year loans do offer a lower cost route to getting your first foot on the housing ladder, staying with them until the end can be very expensive,” Cooke said.
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“While these loans may have lower monthly repayments, they typically end up costing a lot more over time.
“Essentially, these loans give you a reduction in your monthly cost in exchange for a significant increase in the cost of your mortgage overall.”
Finder research found an extra 10 years on a loan would drop monthly repayments for a $641,416 average mortgage by around $300 per month.
But it would also cost the average borrower $316,000 more in interest over the lifetime of a mortgage.
“I naively took out a 40-year loan when purchasing my first apartment, only to quickly realise how costly it would be in the long run,” Cooke added.
“Fortunately, I was able to sell the apartment a few years later.”
SCU, Teachers Mutual Bank and UniBank have previously offered 40-year loans specifically to first-home buyers.
Resimac, Pepper Money and the Police Credit Union also have in the past on a case-by-case basis.
