Should you take out a 40-year home loan?

Emma Duffy By on July 11, 2019
 
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.  

How does a 40-year home loan work?

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 because you’re paying off the loan over a longer time period, the interest has more time to accumulate. 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 loan40-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

So while you may be paying $228.49 less per month on a 40-year home loan, you are paying $133,533.80 more interest over the life of the loan. 

What are the types of 40-year home loans available?

In Australia, there are three main loan types that are available for 40-year home loans. Fixed-rate loans aren’t generally 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

Company Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
3.15% 3.17% $1,718 More details
Purchase or Refi, P&I 80% Smart Home Loan 3.03% 3.05% $1,693 More details
Base Variable Rate Special P&I 3.35% 3.39% $1,762 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Low Rate Home Loan w/Offset
3.15% 3.17% $1,718
More details
Purchase or Refi, P&I 80% Smart Home Loan
3.03% 3.05% $1,693
More details
Base Variable Rate Special P&I
3.35% 3.39% $1,762
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. *Rates correct as at 9th September 2019. View disclaimer.

Package home loans

Package home loans involve combining your home loan and other commonly used financial products into one bundle. 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 significant pros and cons when it comes to 40-year home loans – the biggest one being the mountains of extra interest you’ll end up paying.

ProsCons
The minimum monthly repayments are lowerYour 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 purchasesThe 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 rate, utilise 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 2018. They are (in descending order): Credit Union Australia, 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 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, Savings.com.au 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 includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

Emma Duffy
Emma Duffy joined Savings.com.au as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of women and millennials by writing about complex financial topics (what's an ETF I hear you ask?) in a way that's easy for the average Joe (or Jill) to understand.
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