Should you take out a 40-year home loan?

author-avatar By on July 11, 2019
Should you take out a 40-year home loan?

Image by Wayhome Studio via Adobe Stock

If you’ve recently taken out a home loan with a 25 to 30-year term, paying it off may seem like an impossible task. Imagine then, tacking on an extra ten to fifteen years to the loan term.

That’s right, some lenders are offering 40-year home loans. Unsurprisingly, most of these lenders are targeting first home buyers for these 40-year mortgages because first home buyers have the gift of time on their side.

While a 40-year home loan may help to ease the financial burden for borrowers through a smaller repayment amount, there’s a pretty big catch. Because the loan term is longer, borrowers generally end up paying a much higher amount of interest in total (up to hundreds of thousands of dollars extra). 

40-year mortgage lenders

Currently, only a handful of lenders in Australia offer 40-year home loans, four of which are customer-owned banks (e.g. credit unions and building societies), while two are non-bank lenders. To date, none of the major banks offer a 40-year maximum loan term.

But some first home buyers are turning to these longer loan terms in a bid to try and get a foothold in expensive property markets. 

So are 40-year home loans worth considering? Or are they a recipe for financial ruin? Let’s start by looking at how 40-year home loans work.

40-year home loan vs 30-year home loan

A 40-year home loan works in much the same way as any other home loan, really – you’re just paying off the loan slower, which means your repayments are smaller. 

But with the debt stretched out over a longer time period, you'll be racking up significantly more interest on that debt. So the short-term savings you may make on the monthly repayments is likely to be negated by the extra interest you’ll pay over the life of the 40-year loan versus a 30-year loan, as demonstrated below. 

30-year home loan 40-year home loan
Loan: $400,000 $400,000
Interest Rate: 4.5% p.a. 4.5% p.a.
Monthly Repayment: $2,026.74 $1,798.25
Total Loan Payment: $729,626.85 $863,160.65
Total Interest Cost: $329,626.85 $463,160.65

As you can see from the mock example above, you might pay $228.49 less per month on a 40-year home loan, but you are paying $133,533.80 more interest over the life of the loan compared to a 30 year loan.  

Types of 40-year home loans

In Australia, there are three main loan types that are available for 40-year home loans. You're very unlikely to find any fixed-rate loans offered for 40-year home loans in Australia.

Low-doc home loans

Low-doc home loans, or low documentation home loans are ideal for people who are self-employed or who don’t have the correct proof of income documents available at the time (or can’t get them at all).

But these loans can attract higher interest rates to offset the risk to the lender, and they’re not very common anymore. 

Variable rate home loans

A variable rate home loan is a home loan where your interest rate will move (or vary) with changes to the market. This means your interest rate can either rise or fall over the term of your loan. 

Variable rate home loans also have appealing features such as the ability to make extra repayments to pay off the loan sooner and save you interest. 

Compare variable home loan rates

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
FixedMore details
NO UPFRONT OR ONGOING FEES

Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

NO UPFRONT OR ONGOING FEES

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. Rates correct as of September 27, 2021. View disclaimer.

Package home loans

Package home loans involve combining your home loan and other financial products together. Package home loans usually come with interest rate discounts and additional incentives, but they typically also have an annual package fee which can be several hundred dollars. 

Some package home loans allow borrowers to take out a home loan for a 40-year period.  

Pros and cons of a 40-year home loan

There are pros and cons when it comes to 40-year home loans – the biggest con being the mountains of extra interest you’ll end up paying.

Pros Cons
The minimum monthly repayments are lower Your total interest costs will likely be hundreds of thousands of dollars extra, which you may struggle to make back if you sell the property. 
Can be attractive to first home buyers who may initially struggle to afford home loan repayments, but have time on their side to pay off the loan at their own pace  It will take longer to build equity in the property, unless you make additional repayments
You may be able to afford a better house, as you can afford to make the lower repayments  Fewer loans to choose from since only a handful of lenders offer 40-year mortgages
Lower mortgage repayments can free up extra cash for other life purchases The interest rates on 40-year mortgages aren’t as attractive as some of those available on 25 and 30-year mortgages.  

Savings.com.au’s two cents

We’ve got a lot to say about 40-year home loans – in particular, why they can be a really, really bad idea. 

Forty years is almost all of an average working life, meaning that many people who take out these loans will be retired before they’ve even paid it off. And the fact that APRA, and many institutions, regard 40-year home loans as a risky product should tell you enough.

A 40-year mortgage might mean your monthly repayments are lower – but any savings you might make there can be completely offset by the fact that you’re paying hundreds of thousands of dollars extra in interest over the life of the loan. That’s because you’re stretching out the loan for an extra decade, so the bank gets to charge interest for an extra decade. And as you can see, ten years of compounding interest is a lot of money (to the tune of hundreds of thousands of dollars. HUNDREDS OF THOUSANDS). 

Are those smaller monthly repayments really worth it in the long run if you’re paying that much more in interest? 

The decision to take out a 40-year home loan is personal and entirely your decision to make. However, at Savings.com.au we’re of the belief that it’s better to scrimp and save so that you can pay off your home loan as fast as possible – even if it means living a more frugal lifestyle for a few years while you do so. 

Besides, there are many other ways you can save money on your home loan without resorting to stretching out the payments over a 40-year home loan. You can refinance your loan to a lower rateutilise an offset account, make extra repayments, or make more frequent fortnightly or weekly repayments instead.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Emma Duffy is Assistant Editor at Your Mortgage and  Your Investment Property Mag, which are part of the Savings Media Group. In this role, she manages a team of journalists and expert contributors committed to keeping readers informed about the latest home loan and finance news and trends, as well as providing in-depth property guides. She is also a finance journalist at Savings.com.au which she joined shortly after its launch in early 2019. Emma has a Bachelor in Journalism and has been published in several other publications and been featured on radio.

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