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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.
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.
The main loan types that offer 40 year terms include:
In Australia, fixed rate loans aren't usually offered for 40 years, but rather for terms of between 1 - 10 years.
You should always take time to compare mortgage offerings from different providers. The key points to consider while comparing loans include:
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 |
Consider the above disadvantages of the 40 year mortgage; there are some things that borrowers need to seriously consider about these loans:
Commonly asked questions about the 40 year mortgage include:
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.
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.
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.
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