This homebuying feature is growing in Australia. But there's a $275k catch

Imagine paying a mortgage from today until 2066. For some Australians, that could become a reality as more lenders offer 40-year home loans.

In the last few years, an increasing number of smaller lenders in Australia have begun to offer these extended loan terms — a decade longer than the standard 30-year term.

Australian bank AMP was the latest to jump on the bandwagon, recently announcing a new 40-year mortgage product for investors.

It joins a relatively small list of competitors including Credit Union SA, Unity Bank, Great Southern Bank, RACQ Bank, Bank of Us, Liberty and Pepper Money.

Sally Tindall, data insights director at financial comparison site Canstar, told SBS News many of the 40-year mortgages are geared towards younger people and first-home buyers.

Last year, a Finder survey found that 30 per cent of Australians would take out a 40-year mortgage if it reduced their monthly repayments to a more affordable level.

But experts warn there are major downsides that would-be borrowers should weigh.

The trade-offs of a 40-year mortgage

With house prices at historic highs, a longer loan term can make it easier for some Australians to enter the housing market by reducing monthly repayments, improving their serviceability or increasing how much they can borrow.

But it comes at significant cost.

According to an analysis by Canstar, an additional decade of repayments on a $600,000 mortgage could reduce a borrower's initial monthly repayments by around $288 but result in nearly $275,000 in extra interest over the life of the loan.

"It improves someone's chances of getting the green light on a loan that they might not have otherwise been able to afford," Tindall told SBS News.

"But really, if you are someone that is struggling to pay off a debt over 30 years, it's worth stopping and thinking, well, is the size of the amount I want to borrow too high for my financial situation?"

Last year, when Great Southern Bank introduced a new 40-year loan, its chief customer officer, Rolf Stromsoe, suggested the product could be a stepping stone for first-home buyers, allowing them to enter the market before ultimately refinancing.

"As their needs evolve and their earnings capacity changes, they may refinance any number of times — but this is the loan that can start it all," he said.

But Tindall warned that refinancing may be a challenge with this type of product, given the limited pool of lenders that offer them and their high-risk profile.

It also exposes borrowers to the risk of being trapped in a loan they could struggle to refinance.

"Is that pay rise guaranteed? Is that promotion guaranteed? Absolutely not," Tindall asked.

"It might all work out fantastically. It might not, and so it's really important to be looking at the alternatives, so that you understand the risks of that particular strategy, and go in with your eyes open."

She added that with fewer lenders to choose from, interest rates on these loans could be less competitive.

A growing trend?

Amid a global housing affordability crunch, longer loans are also gaining traction in several other countries.

In the UK, mortgages stretching beyond 30 years have become increasingly common, while 50-year loans are gaining popularity among younger buyers in Japan.

In the US, President Donald Trump floated the prospect of a 50-year mortgage last year.

Sarah Megginson, personal finance expert at Finder, said she expects more lenders may start offering 40-year loans in Australia as housing becomes increasingly out of reach for many buyers.

"I think that we will see more banks respond to customer demands by looking at different ways they can evolve their products and get more lending happening," she told SBS News.

And as the cost of living burden leaves households with limited wiggle room in their budgets, she said, the prospect of saving a few hundred dollars a month on a mortgage may be attractive to some.

"Long term, the pain is there, but in the short term, people are just looking to try and release a bit of pressure," she said, describing longer loan terms as offering "short-term gain for long-term pain".

Tindall, however, doesn't think there's appetite for many lenders to offer 40-year loans.

"I don't think they're going to become more common," she said. "APRA (The Australian Prudential Regulation Authority) sees them as risky, and certainly the big banks don't touch them."

The banking regulator has previously said it places greater scrutiny on higher-risk mortgage lending, which includes lending at very long terms.

There are a range of factors behind this, Tindall said, including the sheer length of the loan. Someone taking out a 40-year mortgage in their 40s could still be paying it off well into retirement, in their 80s.

She doesn't believe longer loan terms are the answer to Australia's housing affordability problem — far from it.

"I can't see a world where we move towards a 40-year mortgage as a solution to overpaying on a property."

"What we need to see in order to make housing more affordable is more stock and lower prices, rather than just getting people to sign up for longer debts."

This article is general information. Please see a professional if you need financial advice.

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