29 May 2006

A Mortgage for Life?

While the 40 year home loan is new to the market in Australia, it is generally common place overseas with borrowers attracted to its lower monthly repayments. Financial services research group. Cannex recently reported that 40 year mortgages WERE NOT UNCOMMON IN THE United States and the United Kingdom.

Cannex sector manager Harry Senlitonga said properties that were out of reach with a 30 year mortgage can suddenly become affordable when the repayments are spread over an extra 10 years.

“As expected 40 year mortgages are attractive to low income borrowers seeking an entry point to the property market,” he said.

“The primary advantage of a 40 year mortgage stems from simple math. By extending the repayment term by an extra 10 years, the monthly repayments become more affordable.

For example:  On a $250,000 loan, the repayments on a 40 year mortgage are approximately $100 lower per month than the repayments on a 30 year mortgage.” he said.

While taking out a 40 year home loan may sound appealing, look before you leap!  Exercise caution when considering the effects of a lifelong mortgage.

“Moving the mortgage term from 30 years to 40 years translates into lower monthly repayments of the principal. This not only means that equity in the home is built up at a slower pace, but it means a significant difference in the cost of borrowing if the loan is in place for the full term. In our example the 40 year loan would cost $150,000 more than the 30 year loan over the full life of the loan.” he said.

“But how real is this risk? Borrowers rarely take a home loan with the intent of paying it off over the full 30 year term. These days the average life of a mortgage is less than 7 years. After this time people typically trade up to a bigger property or restructure their loan to accommodate their changing circumstances.” Mr Senlitonga said.

“Therefore the cost impact of a 40 year mortgage opposed to a 30 year mortgage is likely to be minimal for many, validated by the opportunity to purchase a property that would otherwise be unaffordable.” he said.

Therefore if considering a 40 year loan, borrowers need to consider the following:

  • It is important to check how high the exit fees are if refinancing is to be considered before the end of the loan term.
  • Does the lender charge a higher interest rate than those of standard loans?
  • Can the borrower make extra repayments?

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