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For many homeowners, a 40-year home loan could be the answer to make their mortgage journey more bearable. How likely it would be for lenders in Australia to offer such longer-term home loans?
Your Mortgage spoke to The Investors Agency and DIYBA co-director Bobby Haeri, who shared his insights about the likelihood of lenders rolling out 40-year mortgages and who these could benefit.
“The benefits of offering 40-year mortgages will make servicing those loans more affordable and will allow some of those people who previously did not have the cashflow to be able to afford a mortgage,” he told Your Mortgage.
“No lenders currently offer this — however, I suspect in the next two to three years this will become an option for government workers such as nurses, police force, aged care workers, who are on a lower income.”
For most lenders in Australia, the maximum term allowed is 30 years. Australian borrowers who are interested to extend their loan term are encouraged to speak to their lender for any special arrangements.
How could 40-year mortgages help?
Mr Haeri said the increased serviceability and improved cash flow a 40-year home loan provides will give opportunities to potential homeowners who previously could not enter the market.
“But at the same time, this would significantly increase demand in the housing market, which in turn will put upward pressure on house prices,” he said.
To illustrate how 40-year mortgages can help ease monthly repayments, Mr Haeri used the sample of a 30-year mortgage with a 5% p.a. interest and 10% deposit for a home value of $896,000 (median price over the March 2023 quarter, according to the Australian Bureau of Statistics).
For the 30-year mortgage, borrowers would need to pay $4,249 monthly.
“If that property could be bought with a 40-year mortgage the repayments would be $3,809 per month meaning your repayments would be $440 less each month —to put it into context, this would be like someone making repayments at 4% interest rather than 5% interest.”
Mr Haeri said the ideal borrowers for such longer-term home loans are lower-income earners in safe and stable jobs, such as nurses, aged-care workers, police, and government workers.
“I think it is a great idea for those demographics most needed — offering a 40-year mortgage to those people could mean they could start paying off their own property rather than paying rent,” he said.
For Mr Haeri, this would mean less pressure on rent prices, which will be a good thing for renters who might still not be able to afford a mortgage even with a longer loan term.
“If their income increases, they can always increase their repayments, however, they have the option to make smaller repayments over a longer period should their cashflow not support a 30-year mortgage.”
Will 40-year mortgages impact the housing market?
Mr Haeri said if 40-year home loans become widely available, it would increase the demand for housing, which would then put upwards pressure on house prices.
“How much of an impact it has, will depend on how it is implemented. If it's only implemented to the lower income earners or those on government jobs, then it would only impact the properties within the affordability belt,” he said.
“I don't believe they will implement it across the board, at least not initially.”
Mr Haeri believes if such loans are offered to investors, they would be encouraged to do principal and interest repayments rather than just interest-only.
“They may find their cashflow position is very similar whether they choose to do interest-only or 40-year mortgages,” he said.
Will there be risk to financial stability? Mr Haeri believes the banking system already has a stringent due diligence process to lend to borrowers, which makes any risks to stability unlikely.
However, Mr Haeri said borrowers must consider that they would actually pay more in interest over the life of the loan with a longer loan term.
“The bank would be the major winner with offering a 40-year mortgage — on a 30-year mortgage using the example earlier, the interest paid would be $789,794 if you choose a 40-year mortgage your interest paid would be more than $1.1m.”
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $2,408 | Principal & Interest | Variable | $0 | $530 | 70% | Featured Online ExclusiveUp to $4k cashback |
| |||||||||
5.99% p.a. | 5.90% p.a. | $2,396 | Principal & Interest | Variable | $0 | $0 | 80% |
| ||||||||||
6.14% p.a. | 6.16% p.a. | $2,434 | Principal & Interest | Variable | $0 | $250 | 60% |
| ||||||||||
5.95% p.a. | 5.95% p.a. | $2,385 | Principal & Interest | Variable | $0 | $0 | 90% | |||||||||||
5.94% p.a. | 5.95% p.a. | $2,383 | Principal & Interest | Variable | $0 | $0 | 90% |
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