Alternative lender Pepper Money will give all its customers the option of taking up a flexible 40-year loan term from 12 December.
Pepper has pitched the new advertised loan term as a way for clients struggling with serviceability to enter the housing market.
A 40-year loan term will effectively lower a borrower's monthly mortgage repayments but will mean homeowners pay considerably more in interest over the life of their loan.
For example, on a $650,000 loan with a 6.5% p.a. interest rate, customers moving from a 30- to 40-year loan term will pay around $300 less in monthly repayments but almost $350,000 in extra interest over the life of the loan.
The majority of new home loans are currently taken out over 30 years, but with a rapid rise in both home values and interest rates in recent years, there are concerns lower-income earners are being increasingly locked out of the mainstream mortgage market.
Longer-term loans already out there
Pepper Money said it's receiving significant enquiries about its flexible 40-year mortgage option, though it's nothing new.
The lender's general manager of mortgages and commercial, Barry Saoud, said the company has been offering 40-year loan terms to support customers with unique circumstances for more than 20 years.
“Now we’re extending this option to even more borrowers, making home ownership more affordable by lowering monthly payments to offer budget relief,” Mr Saoud said.
Barry Saoud, Pepper Money general manager mortgages and commercial
He said borrowers are consistently seeking greater flexibility beyond what banks can typically offer.
“This extended mortgage term addresses the real-life needs of borrowers facing housing affordability, longer working lives, and the rising cost of living."
Critics weigh in
But one financial expert has labelled the 40-year loan term “a terrible idea”.
Motley Fool chief investment officer and share market commentator Scott Phillips said he wonders if people understand what they’re signing up for.
Mr Phillips has long been a critic of longer-term loans, describing them as offering short-term gain and long-term pain, shackling Australians to an additional 10 years of debt.
But Mr Sauod says it’s important to weigh the benefits against the drawbacks.
“Our goal is to help customers to manage and repay their loan responsibly,” he said.
“Our data shows most customers pay above the minimum required repayments and don’t see out the full 40-year term.
“Most get back on their feet and will refinance their mortgage when their circumstances change.”
More longer-term loans on the way?
It’s tipped more mainstream lenders will launch longer-term home loan products over the coming months.
In July, ANZ boss Shayne Elliott floated the idea of offering longer mortgages as way of getting more borrowers into the market without putting them under mortgage stress.
Many lenders already offer the option of extended loan terms to borrowers struggling to meet their repayments.
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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 | 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. | 5.95% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| ||||||||||||
6.23% p.a. | 6.23% p.a. | $3,072 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
