Demand for 40-year mortgages may be set to rise as buyers try to get a foothold into the housing market and with prices becoming out of reach for many.
A clutch of non-bank lenders and mutual lenders offer the product, which enables borrowers to have lower mortgage repayments of about $2000 a year and increased borrowing capacity by up to $50,000.
Demand for the longer period mortgages is rising in Canada, the UK and Japan. In California, 40-year mortgages now account for one-quarter of new home loans.
In Australia, criticism of 40-year mortgages stems primarily from ballooning interest payments due to the longer loan term and higher interest rate compared with a standard 30-year home loan term.
However, mortgage broking industry veterans such as Joe Sirianni argue this issue has been overstated given that most home loans are refinanced every four years on average, meaning borrowers would never pay the amount of interest quoted over a 40-year term.
“It’s not a silly product. It’s got a lot of merit,” said Mr Sirianni, executive director of mortgage broker Smartline and a former president of the Mortgage and Finance Association of Australia. “A 40-year loan can be a good proposition for a young person trying to buy their first home, who has just started work, has good income, but doesn’t have a big deposit.
“Over time, as their income rises, they can increase their repayments or refinance into a cheaper, shorter term mortgage. At the same time, the value of their property should rise.”
Three of Smartline’s lenders – Liberty Financial, LaTrobe and Pepper – offer a 40-year home loan, but take-up is low. Mortgage comparison service, finder.com.au, has seven lenders on its website offering 40-year loans with interest rates ranging from 5.2 per cent to as high as 7.44 per cent. Average savings work out at about $175 a month.
ASX listed non-bank lender Homeloans recently arranged a $600,000 loan over 40 years for a couple buying their second home, a $750,000 four-bedroom suburban house in Perth.
The couple could not arrange bank financing because lenders would not recognise the husband’s income, which he earned overseas.
“They would only recognise the wife’s income,” said Homeloans sales manager Greg Mitchell. “We found that over 40 years they had the capacity to service the loan.”
None of the major banks offer the product per se. A Westpac spokeswoman said borrowers could apply to have their loan term set back to 30 years once it was established. A NAB spokesman said it assessed home loan applications greater than 30-year on a “case by case basis”.
Peter Wood, general manager of specialist lender Bluestone, said 40-year home loans were appropriate in some circumstances.
“With median property prices increasing, it’s one way of dealing with the affordability factor. First-home buyers are among those that could benefit, ” he said.
Bananacoast Community Credit Union recently extended its 40-year home loans to include its discounted variable home loans following a pick-up in demand.
“It’s especially suited to first-time buyers and young professionals but it’s not for everyone,” a spokeswoman said.
BCU recommends customers review their repayment profile periodically with a view to increasing repayments and reducing the loan term.