Seven lenders offer 40-year mortgages with massive interest costs
This story was published: 11 days ago February 15, 2014 12:00AM
DESPERATE homebuyers are locking themselves into 40-year mortgages and forking out hundreds of thousands of dollars more in interest costs to do so.
Multiple lenders are offering home loans spanning four decades but experts are concerned about the extended mortgage periods that stretch out across an entire working life.
REAL ESTATE PRICES TO KEEP GROWING
Data from financial comparison website Finder found there are 17 40-year home loan deals available on the market by seven lenders.
On a $400,000 loan with an average interest rate of 7 per cent the customer would end up forking out an additional $235,000 in interest costs than they would if they chose a 30-year-old loan period.
HOUSING MARKET STRONG DESPITE FALL IN HOME LOANS
LATE PAYMENT ON MORTGAGES FALLS
The Mortgage and Finance Association of Australia’s chief executive officer, Phil Naylor, warned people against taking out these lengthy mortgage periods.
“If you let the mortgage run the full 40 years you end up paying a mountain of interest,’’ he said.
“For the extra interest you pay over the course of the loan that probably far outweighs the benefit you get by paying smaller payments each month.
“The intention for most people who go into 40-year mortgages is that they would only stay with that mortgage until they were in a better position to pay off their loan quicker and then they would refinance into a shorter mortgage.”
Home prices continue to rise 2:53
RP Data has found home prices have continued to climb in January, with Melbourne leading the charge.
The lenders offering 40 year mortgages includes Pepper Home Loans, Teachers Mutual Bank, Home Loans, Hunter United Credit Union, BCU, Police Credit and BananaCoast Community Credit Union.
Peppers Home Loans chief operating officer David Holmes said about 20 per cent of their customers opt for 40-year loan and said they appealed mostly to entry-level buyers.
“We’ve offered 40 years mortgages for about four years now and about one in five opt for a 40-year term,’’ he said.
“It tends to be people who are buying their first home or they want a longer term to help them reduce their repayments initially rather than having a 25 to 30-year term.’’
Teachers Mutual Bank’s deputy chief executive officer Brad Hedgman said they introduced them several years ago to help younger home buyers “get their foot in the door.”
“We saw it as a way to help people who are struggling to get their deposits together,’’ he said.
“It’s only available on our first homeowners’ loan product and comes with features including that they can borrow up to 98 per cent.
“About one third of all our first home buyers take up these loans.”
Some countries including the U.S. have even offered 50-year mortgages and Mr Hedgman said this could be something that would eventually be available in Australia.
Mortgage Choice spokeswoman Jessica Darnbrough said they had two lenders offering 40-year loans but said longer mortgages should be taken on with extreme caution.
“Both of these lenders’ 40 year loan products are targeted at borrowers who fall outside of the normal lending criteria, ie: they are credit impaired in some way,’’ she said.
“A longer loan period can suit a credit impaired borrower as it may offer them a longer ‘interest only’ term — that is to say that they can spend longer making the minimum repayments.
“These sorts of loans do not benefit a non-credit impaired borrower as it increases the amount of interest they pay and ultimately makes the loan more expensive in the long run.’’
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