How home buyers can lift their budget and slash their payments – and why they shouldn’t

Home buyers could save almost $300 a month on their mortgage and increase their budget at auction by adding 10 years to the life of their home loan, new modelling shows, but their interest bill would soar.

A handful of Australian lenders have started offering 40-year home loans, instead of the standard 30-year mortgage that was designed to balance the borrower’s ability to manage monthly repayments over their working lives, with the total interest paid over the life of the loan.

They’re not alone. In a bid to address concerns about a fall in homeownership, some European countries are offering extremely long mortgage terms. In Sweden, mortgages have been “capped” at 105 years, after a study found it would take people 140 years to pay back their loans at their current rate.

In Britain, home loans that last as long as 40 years – so-called marathon mortgages – are on the rise, at more than half of all residential mortgage products now. The theory is this can make it easier for some people to get on the property ladder by stretching out payments over a longer period.

But a longer repayment period may not be as useful as it first appears in helping Australians into homeownership, and it comes with hidden costs.

Comparison platform Canstar says that, in theory, the longer the duration of the loan, the more a potential home buyer can borrow.

Yet this depends on how much money a bank is willing to lend someone, as well as the bank’s appetite for risk.

“While a first home buyer might be tempted to overstretch the budget and commit to a 40-year debt in order to get that first foot on the property ladder, they should stop and consider alternative ways to boost their borrowing capacity,” cautions Canstar’s data insights director, Sally Tindall.

“If an owner-occupier looking to borrow $600,000 took out a 40-year loan term, instead of a 30-year loan term, at the same rate of 5.99 per cent, their initial monthly repayments would be $296 lower.

“However, by opting for the longer loan term, they could potentially end up paying over $240,000 more in interest if they stick to the 40-year loan term.”

At present, six lenders – G&C Mutual Bank, Australian Mutual Bank, RACQ, Resi Mortgage, Pepper Money and Credit Union SA – offer 40-year loans, while ubank is offering 35-year mortgages.

Tindall said a single person on the average full-time wage could potentially borrow just $24,000 more by extending their loan term from 30 to 40 years. A couple could borrow $48,000 more, based on her calculations using RACQ’s borrowing capacity calculator. But there’s no guarantee the bank would lend more at all.

In a cost-of-living crisis, some buyers are already asking about longer loans.

Alan Hemmings, chief executive at Home Loan Experts, says expensive housing means longer loan terms could become more common. He often sees clients trying to “explore options to extend their loan terms, particularly when they are trying to increase their borrowing capacity or manage their monthly repayments”.

“With rising property prices and borrowing capacity constraints, lenders may offer longer terms to help first-home buyers afford repayments. However, the real trend we see in Australia is that borrowers tend to refinance multiple times over their loan’s lifetime to secure better interest rates or adjust their financial situation,” Hemmings adds.

Clinton Waters, director of AXTON Finance, says most borrowers will have a mortgage for this time frame anyway.

“Younger buyers buy and sell and keep resetting their mortgage term each time they refinance or start a new loan contract, effectively achieving the same thing,” he says.

A recent Finder survey of 1013 respondents found 30 per cent of them would take out a 40-year home loan if it reduced their monthly repayments – even if it cost hundreds of thousands of dollars more in the long term.

Graham Cooke, head of consumer research at Finder, had a 40-year mortgage on his first apartment in Ireland pre-GFC. He says 40-year mortgages are best avoided due to the increase in costs long-term.

“I didn’t realise this was an unusual term length at the time and was shocked with the huge interest cost when I did the calculations. Thankfully, I managed to sell the apartment a few years later,” he says.

There’s another catch: Hemmings says the later people enter the housing market, the harder it is for them to secure longer loan terms.

“Lenders will want strong exit strategies with older age, and a longer term would warrant an even stronger strategy,” he says. “MA Money, for example, offers 40-year loan terms only to applicants under 40 years old. Pepper is unlikely to offer loan terms beyond someone’s retirement age, unless they have a huge super balance or other assets.”