Q. I am looking to purchase my first home and I have had one lender offer me a 40 year home loan. The lower repayments would definitely help me keep a manageable budget, but it does mean I will have the mortgage for an extra 10 years. Is it a good idea to choose a 40 year home loan term?A. Many lenders are offering home loan periods of up to 40 years in order to help home buyers get into the property market faster. However, like you said, it does mean you will be stuck with this mortgage for a long time. So, although the repayment amounts may be smaller, you will end up paying a significant amount of money on interest. These long term costs will mostly likely outweigh the benefits of this type of loan.
Also, although interest rates are currently at a record low, there is a very good chance that the interest rate will both increase and decrease over the next 40 years, so even though the repayments may be affordable now, that could quickly change if the interest rate increases.
According to the Mortgage and Finance Association of Australia’s chief executive officer, Phil Naylor, many home buyers actually take out a 40 year loan with the intention of refinancing to a shorter loan term when they are in a better financial position. However, before you decide to use this strategy, it is important to remember that it can easily backfire if you don’t manage your finances properly. For example, if you don’t manage your finances after being approved for a 40 year home loan and incur more debt, it could affect your chances of being approved for a refinance loan. This would then mean that you are stuck with the 40 year mortgage for longer than you hoped for.