40 year home loans make for cheaper repayments than regular 30 year terms, but come with higher total interest costs.
While most home loans are offered with a maximum of 25 or 30 year terms, the 40 year home loan is still available with some lenders. A 40 year home loan works in much the same way as those more traditional loans, although with a longer maximum loan term. The main benefit to borrowers who take out these loans is that they pay reduced repayments, as they will have longer to pay it off. The main drawback, is that because they have their loan for longer, they end up paying a higher amount of interest in total. There is greater risk with this type of loan when compared to a regular loan, so it's strongly recommended that financial advice is obtained before applying for one.
While the repayments might seem an attractive option for borrowers, because of the longer term there is more risk associated with having a mortgage spanning over 40 years. It may be worth consulting with a financial advisor or mortgage broker before entering into this type of loan to see if this is the right choice for you.
How does a 40 year mortgage work?
A mortgage is a term for a monetary loan attached to paying off the purchase of a home; so discussing a mortgage as being on a 30 year, or 40 year, term means that the loan will be expected to be paid off within that particular amount of time. Because of this extended loan term, you are paying the loan off more slowly, and interest has more time to accumulate.
Think of the interest difference like this: you can get a 30 year or a 40 year mortgage at a fixed rate of 5.25% p.a. on a loan of $250,000. The 40 year mortgage, while the monthly payments are lower, still has 10 more years on the 30 year mortgage to accrue interest. This is shown in table form below:
| 30 year mortgage | 40 year mortgage | |
|---|---|---|
| Loan Amount | $250,000 | $250,000 |
| Interest Rate | 5.25% | 5.25% |
| Monthly Payment | $1,380.51 | $1,247.18 |
| Total Interest Paid | $246,983.33 | $348,644.40 |
| Total Amount Paid | $496,983.33 | $598,644.40 |
So, while you may be paying $133.33 less per month on a 40 year term, you are saving $101,661.07 in interest payments by selecting a 30 year loan.
What are the types of 40 year mortgages available?
The main loan types that offer 40 year terms include:
- Package home loans. Some package home loans can allow borrowers to take out their loan for 40 years. Package loans usually come with rate discounts and additional incentives.
- Variable rate home loans. The variable interest rate means just that; the rate is flexible and varies over the life of your loan. Sometimes, the rate can be negotiated.
- Low-doc home loans. These loans are often opted for by those who are self-employed or who have their income tied up in investments, and require less documentation. As such, they may come with higher interest rates to offset the risk the lender may be taking on.
In Australia, fixed rate loans aren't usually offered for 40 years, but rather for terms of between 1 - 10 years.
How to compare 40 year mortgages
You should always take time to compare mortgage offerings from different providers. The key points to consider while comparing loans include:
- Choose a loan type that fits your budget: If you want control over your repayments for the first few years of your loan, then a fixed rate option may work well for you. Whereas if you want to take advantage of favourable market conditions, you may want to opt for a variable rate. The important thing is to consider any ongoing fees that may eat into your budget as well.
- Are there any additional fees? If you want to have the option of paying off the loan before the end of the 40 year term, check if there are any early repayment fees. Some loans have a monthly administration fee; check all possible fee amounts when comparing loans.
- Does the loan fit your plans? In addition to fitting with your budget, ensure that the loan offers some flexibility when it comes to planning for the future. Nobody can truly plan for the future, and there is a possibility that you will be moving from the home that you are borrowing for. See if you can find a loan with lower discharge fees if you decide to leave during the fixed term, or with no early repayment fees if you refinance later on.
Pros and cons
Like anything involving risk, there are significant pros and cons that you should become familiar with before deciding whether to borrow on a 40 year term:
| Pros | Cons |
|---|---|
| Lower monthly payments | What you save in monthly payments, you may make up for in interest |
| Get a larger house with a lower income; you can afford to make the lower payments | You may not be approved for the mortgage amount to cover the cost of the home if your income is too low |
| You will have more money to cover everyday expenses not related to your home | You will not build equity as quickly as you would in a mortgage with a lesser term |
| Many 40 year mortgages are offered with a variable interest rate, letting you take advantage of favourable market conditions should they arise | When you sell the home, you may not make back what you’ve paid in interest over the life of your mortgage |
Things to avoid about 40 year mortgages
Consider the above disadvantages of the 40 year mortgage; there are some things that borrowers need to seriously consider about these loans:
- Fixed-rate 40 year loans: can include costly discharge fees and administration fees, and accrue interest quickly, meaning all of your hard-earned money will be put towards your home and not towards your savings.
- Ensure that you are getting the lowest possible interest rate from your 40 year mortgage: as these loans may come with higher rates than those of mortgages spanning 30 years or less.
- Check what the minimum payment will be: if you cannot pay more than 20% down, you may be subject to paying Lender’s Mortgage Insurance (LMI) which could cost you thousands of dollars.
- Borrow from a reputable institution: avoid signing onto a mortgage from a bank that has a less than favourable reputation, or one that you are unfamiliar with. If you are unsure, you can always speak to a mortgage broker.
Frequently asked questions about 40 year home loans
Commonly asked questions about the 40 year mortgage include:
How much can I borrow on a 40 year mortgage?
This depends on your income and credit history, along with the lending terms and conditions of your selected institution. Check the borrowing power calculator to find out the amount you may qualify to borrow.
What kind of exit fees should I be expecting if I pay off my 40 year mortgage early?
Exit fees on variable rate loans are now banned, though break costs may still apply to fixed rate loans. There are also early repayment fees and discharge costs that may be applicable. These fees will be outlined in the PDS.
What is the minimum down-payment needed to purchase a home?
Typically, you are required to put down at least 5% of the total cost of the home, but down-payments of under 20% require the borrower to purchase mortgage insurance. It is ideal if you can pay 20% or more on the total cost of the home.
Choosing a mortgage, whether you are purchasing a second home or your first one, can be overwhelming. Be sure to compare the features and the interest rates of several different lenders to ensure you’re getting the best deal.
