Mortgage terms longer than 30 years are already common in the UK and are starting to become more prevalent in Australia. Lenders like RACQ Bank allow first home buyers to extend their mortgage up to 40 years, while in late 2024 Pepper Money announced it would start offering 40 year terms to all customers.
A 40-year home loan can mean lower repayments since the principal amount is paid off in more instalments. The catch is over the entire loan term, the total interest bill can end up a lot bigger.
40-year home loan vs 30-year home loan
Here's how 30 and 40 year loan terms compare for the same loan size and interest rate:
| 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 could 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.
Pros of a 40 year loan term
There are a few benefits to lowering your repayments with a 40 year loan term:
Free up cash flow
With lower monthly repayments, you'll have more disposable income left over each month for other expenses. This could mean living more comfortably or allow you to make other investments, perhaps in the share market or even an investment property.
Read more: Shares v Property
Improve borrowing power
Extending your loan term may allow you to borrow a larger sum. Lenders assess your borrowing power using your income and expenses (plus the serviceability buffer) to work out if you can make your repayments. Since a longer loan term lowers your repayments, you might be able to borrow more and buy a more expensive property than you otherwise would have.
Get into the market sooner
Lower repayments and expanded borrowing power can allow first home buyers to get into the market sooner. This can be invaluable if property prices are going up fast.
Cons of a 40-year loan term
At the same time, there's a reason why some people think 40-year home loans are a terrible idea.
Higher total interest bill
While lower repayments save you in the short term, over the entire loan term the extra interest will likely far outweigh these initial savings. If you're considering a 40-year term you should first work out exactly how much it will add to your interest bill, and whether it's a trade off you're willing to make.
Takes longer to build equity
Lowering your minimum repayments means each month you're paying off less of the principal amount you owe, which means you aren't building equity as fast. Higher equity lowers your loan-to-value ratio (LVR) which can mean lower interest rates, and you can also borrow further against your existing equity.
Fewer lenders to choose from
While more lenders are starting to offer 40-year terms, the likes of Pepper Money remain an exception. None of the major banks at the time of writing offer 40-year terms, so you'll have less options to pick from compared to shorter term lengths.
In debt for longer
A fully paid off mortgage is a long term goal of many. An extended loan term might improve your cashflow in the short term, but you should think seriously about whether this will be worth having a loan hanging over your head for an extra ten years.
Which lenders offer 40-year home loans?
- Great Southern Bank
Available to first home buyers purchasing owner occupied properties and making principal and interest (P&I) repayments with a maximum LVR of 90% (including home loan fees).
- Australian Mutual Bank
Available to first home buyers taking out a variable rate owner occupied home loan.
- C&G Mutual Bank/Unity Bank
Available to first home buyers where one or more applicants are aged 30 years or under. (Not applicable to borrowers approved through the Home Guarantee Scheme or Victorian Homebuyer Fund where a maximum loan term of 30 years applies.)
- RACQ Bank
Available to first home buyers under certain conditions.
- Credit Union SA
Available to XL home loan owner occupier borrowers. (Not available in conjunction with the Home Guarantee Scheme.)
- Pepper Money
Available to all customers.
Savings.com.au's two cents worth
At the end of the day these products exist for a reason. Many people clearly value the benefits of lower repayments enough to consider a 40-year term worth it - for example if your priority is to get onto the property ladder as soon as possible, lower repayments could improve your borrowing power enough to do so.
However at risk of being facile, 40 years is a long time. It's only slightly less than half of the average Australian's life expectancy, so it's difficult to overstate what a big commitment a 40-year loan term is. The extra decade of interest could also make your loan hundreds of thousands of dollars more expensive, so it's vital to crunch the numbers beforehand to understand exactly what you're signing up for.
You might ultimately decide a 40-year term is for you, but there are also plenty of other ways you can save money on your home loan without resorting to stretching out the payments over a 40-year home loan. You could refinance your loan to a lower rate, utilise an offset account, or make overpayments to pay your loan down sooner.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
