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40-year home loans
40-year home loans are very rare in Australia. Borrowing money over 40 years will lower your monthly repayments but you will pay more interest in the long run.
The vast majority of Australian borrowers get home loans with 30-year loan terms. This is the maximum amount most lenders allow. But it is possible to get a loan with a longer term of 40 years. A 40-year home loan is otherwise identical to other home loans: You borrow money and pay it back with interest charged on top.
The difference is the time involved and the amount of interest you pay. The main benefit for borrowers who take out 40-year loans is that they pay reduced ongoing repayments, as the debt is structured over a longer time period. The main drawback is that because they have their loan for longer, they end up paying a higher amount of interest in total.
It's a really good idea to talk to a mortgage broker before committing to a 40-year home loan.
Why are 40-year home loans more expensive?
Because of the extended loan term on a 40-year mortgage you end up paying the loan off more slowly and interest has more time to accumulate. This is why it costs you more in the long run (and less each month).
Here's an example using our mortgage calculator. These numbers are based on 2 principal-and-interest home loans that are identical apart from the loan term:
30-year mortgage
40-year mortgage
Loan amount
$500,000
$500,000
Interest rate
2.5%
2.5%
Monthly payment
$1,975
$1,650
Total interest paid
$211,217
$291,468
Total amount paid
$711,217
$791,468
Result
You save $80,251
You pay $80,251 more
On a 40-year home loan term, you will pay $325 less a month. However, you'll pay a whopping $80,251 more in interest by the end.
Also, while the 30-year home loan is paid off after 30 years, you'll still pay the mortgage for another 10 years with the 40-year loan term. All in all, the 40-year home loans costs an additional $80,000 over the life of the loan. This is quite a hefty premium to pay in exchange for lower repayments month to month.
Pros and cons of 40-year home loan terms
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
Monthly repayments are lower.
You could potentially borrow more because the repayments are more affordable.
If the loan has a variable rate and allows for extra repayments, you can pay it off faster anyway.
Cons
You'll likely pay tens of thousands more in interest.
You will not build equity as quickly as you would in a mortgage with a shorter term.
You will stay in debt for a whole decade longer than most borrowers.
What are the types of 40-year mortgages available?
The main loan types that offer 40-year terms include:
Fixed rate home loans. With a fixed rate home loan, you won't fix the rate for 40 years. In Australia, fixed rate loans aren't usually offered for 40 years, but rather for terms of between 1 and 10 years.
Variable rate home loans. A variable interest rate means just that: the rate is flexible and varies over the life of your loan. Even if you fix your rate for a few years, with a 40-year term you will definitely spend most of the loan on a variable rate.
Low doc home loans.Low doc loans are popular with borrowers 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.
How to compare 40-year home loans
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. If you want to take advantage of favourable market conditions, you may opt for a variable rate. The important thing is to consider any ongoing fees that may eat into your budget.
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.
Is the rate competitive? These loans may come with higher rates than those of mortgages spanning 30 years or less.
Frequently asked questions about 40-year loan terms
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. If you get a home loan over a 40-year period, you'll most likely be on a variable rate by the time you pay it off. This means your exit costs will be minimal.
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.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification.
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