Non-bank lender Pepper Money will soon offer 40-year home loans to new borrowers, making it the first Australian lender to cross the contentious threshold.
It would see the average first home buyer (aged around 36 years) paying off their home loan well into their retirement years.
However, longer mortgage spans do offer one notable advantage: Lower repayments.
"Borrowers are consistently seeking greater flexibility beyond what banks typically can offer; so, as a non-bank, we are stepping in to fill the gap," said Barry Saoud, Pepper Money general manager of mortgages and commercial property.
Image: Barry Saoud, supplied
"This extended mortgage term addresses the real-life needs of borrowers facing housing affordability, longer working lives, and the rising cost of living."
A person repaying a home loan over 40 years, instead of 30 years, would make smaller regular repayments, as they'd have 10 more years to repay their principal balance.
However, they would also pay interest on their debt for an extra decade, increasing the overall cost of their home loan substantially.
Here's how that extra decade could play out for a person purchasing a median priced dwelling (around $813,000 as of November 2024) with a typical variable rate (6.3% p.a. for new mortgages, as per RBA figures):
| Length of Mortgage | Monthly Repayments | Interest Paid Over Life of Loan | Total Cost (Principal + Interest) |
|---|---|---|---|
| 25 years | $5,389 | $803,481 | $1,616,481 |
| 30 years | $5,033 | $998,610 | $1,811,610 |
| 40 years | $4,645 | $1,416,317 | $2,229,317 |
Pepper Money has been providing 40-year loan terms to customers in unique circumstances for more than 20 years.
It will officially extend that offer to all eligible borrowers on 12 December - seemingly marking the first time borrowers across the board are able to access 40-year loan terms.
Right now, 40-year loan terms are advertised for first home buyers through the likes of RACQ Bank.
"A 40-year loan term mortgage can be a viable option for those looking to lower their monthly repayments or increase their home-buying power," Mr Saoud said.
"The extended mortgage term hands over more flexibility and control to the customer.
"They can opt to pay the minimum in times of need or pay extra when times are good."
Mr Saoud warns would-be borrowers should weigh the benefits of a 40-year mortgage against the drawbacks, which include higher interest costs and slower equity creation, consider the length of the commitment, and suggests they speak to their broker.
"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."
Could 40-year mortgages drive house prices higher?
Recent modeling from the ANZ POLIS Centre for Social Policy Research and CoreLogic showed median-earning Australians purchasing a median-priced property with a 20% deposit would need to pour half their income into mortgage repayments.
It also found even high-income households are at risk of mortgage stress in the current climate.
That reality could worsen on the introduction of longer-term mortgages.
Since a borrower signing onto a 40-year home loan will face smaller mortgage repayments, they'll likely be assessed as being able to borrow more.
While this might help some enter the market, it could also drive house prices higher, as buyers spending their top dollar could create competition in the market.
It's a similar situation to that anticipated on the beginning of an Reserve Bank of Australia (RBA) cash rate cutting cycle.
"Australia is likely to experience a tale of two halves in 2025," Domain chief of research and economics Nicola Powell said this week.
"The first half will be weaker as the dynamics of 2024 carry over, while the second half should see a rebound, with the RBA potentially moving to cut the cash rate, which would serve as a strong catalyst to drawing more buyers back to the market."
40-year home loans increasingly the norm overseas
When it comes to the prevalence of home loan terms of more than 30 years, Australia appears to be behind much of the world.
35- and 40-year mortgages are common in the likes of the US and the UK.
Indeed, according to UK Finance's Household Finance Review, in the third quarter of 2022, half of first time buyers in the UK entered the market with a loan term of more than 30 years, as did a third of buyers moving to a new dwelling.
The UK's shift towards longer mortgage spans was said to be a result of rising house prices and high interest rates compressing affordability.
Image by Drazen Zigic on freepik
Collections: Buying a home Home Loan Lender First Home Buyer Mortgage News
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