Should you select a 25-, 30-, or 40-year mortgage?

Where once borrowers considered whether to take out a home loan over 25 or 30 years, rising property prices are now seeing more 40-year loan products hit the mortgage market.

The first advertised 40-year loan was launched in late 2024 and since then, other smaller lenders have joined in offering 40-year loan terms, some exclusively to first-home buyers.

Put simply, the longer your loan term is, the lower your monthly repayments will be. Lower repayments may sound like an attractive option but the catch with longer loan terms is you'll end up paying far more in interest by the end of your loan.

Many homeowners, particularly first home buyers, tend to focus on the size of their repayments and feel more comfortable making lower payments over a longer period of time.

Thirty years is currently the most common loan term in Australia but it's definitely worth considering whether a shorter-term loan could work for you.

25 years, 30 years, or 40 years: A comparison

Let's check the numbers to see the difference between taking out the same $600,000 loan at 6.5% p.a. interest over 25, 30, and 40 years.

Loan details	25 years	30 years	40 years
Monthly repayment (principal and interest)	$4,051	$3,792	$3,513
Total principal repaid	$600,000	$600,000	$600,000
Total interest paid	$615,373	$765,266	$1,086,116

As you can see, taking out a loan over 30 years will see this borrower paying around $260 a week less in repayments than if they were to select a 25-year term, but could see them paying almost $150,000 extra in interest over the life of the loan.

The same loan taken out over 40 years will see their repayments fall by another $280 per week but increases their overall interest bill by a sizeable $320,000, boosting it to well over $1 million.

While a 40-year loan may be an option to get you into the market, it is far from the ideal long-term strategy.

The cost of a shorter home loan vs a longer mortgage

Even if you choose to take out a home loan over a standard 30-year period, it can be a great cost-saving strategy to make the repayments as if you'd taken it out over 25 years. That way you can have the psychological comfort of a longer loan term - as you'll only need to meet minimum repayments if times get tough - with the interest savings advantage of a shorter one.

If this is your strategy, you need to be sure the loan you choose allows extra repayments. It is usually permitted under most variable loans but generally not fixed rate ones. Some lenders may also levy extra repayment charges so be aware of the conditions of your particular loan.

Any extra payments you make towards your loan effectively reduce the principal balance and therefore the interest you pay. If there are times you can't manage the higher amount, you can pay the minimum 30-year repayment.

Our mortgage repayment calculator can help you decide what will be the best strategy for you.

Of course, there are many other cost-saving strategies you might employ to reduce the cost of your loan, like making weekly or fortnightly payments or taking advantage of offset and redraw facilities.

See also: How to 'tinker' your home loan to reduce your repayments

Long-term loans and borrowing power

One reason some borrowers may choose to take out a loan over a longer term is that it can be a relatively easy way to boost their borrowing power.

In simple terms, your borrowing power - or borrowing capacity - equates to the amount of money a lender is willing to lend you based on your unique financial circumstances. Lenders calculate this based on your income, expenses, and existing debt, as well as applying regulatory buffers to assess your ability to repay a home loan.

See also: How to boost your borrowing capacity

With a longer loan term effectively lowering your regular home loan repayments, this can be one strategy to get your home loan application over the line.

For some borrowers, this can provide a valuable entree to the property market but shouldn't be a set-and-forget strategy.

What do the experts say?

Mortgage broker Chris Wisbey, general manager of Scene Finance, said choosing the term of a loan should depend on your individual circumstances.

"The longer the loan term, the better your serviceability," Mr Wisbey told Your Mortgage.

"The shorter the loan term means higher monthly repayments so that can reduce your borrowing capacity.

"It's that simple, so it really boils down to the applicant and the amount they want to borrow. With property prices going up all the time, if you want to borrow as much as you can, longer terms can provide better affordability."

Chris Wisbey, general manager Scene Finance

But it doesn't mean you're locked in for the full term of the loan. Mr Wisbey said it's quite rare for the average home loan to run for its full term in the current mortgage market.

"People tend to rate shop these days so we're seeing a lot more migration between lenders, every two or three years.

"Shorter loan terms can reduce your borrowing capacity. Longer term loans can effectively increase it, then you can keep an eye on what else is on the market."

Mr Wisbey also warns borrowers to be aware of exit fees and other such charges when they're looking to refinance.

Some of the lowest home loan rates in the market

If you're looking for a home loan or to refinance your existing loan to better suit your circumstances, the table below features some of the most competitive home loan options on the market:

Important Information and Comparison Rate Warning

Image by Veri Ivanova on Unsplash