- Experts have warned borrowers of the risks of taking on longer-term home loans.
- While 35-year loans can reduce upfront repayments, they increase the interest paid over the life of the loan.
- Home owners could pay hundreds of thousands of dollars extra to the bank by extending their loan term.
Home borrowers who take out a 35-year home loan to reduce the pressure of monthly repayments would pay up to hundreds of thousands of dollars in extra interest over the life of the mortgage.
An owner-occupier who takes out a $1.5 million home loan over 35 years reduces monthly repayments by $389, compared to a 30-year loan, modelling by RateCity found. But the additional five years will increase interest paid by almost $284,000 over the life of the loan.
Experts have warned of the impacts of longer-than-usual home loan terms.Credit:Jason South
The figures are even starker for longer terms. Borrowers who take out the same loan over 40 years will reduce their monthly repayments by $652 but will pay an extra $610,664 over the life of the loan. The figures are based on an owner-occupier paying principal and interest with a 20 per cent deposit.
While only a handful of banks offer longer-than-usual home loan terms to new borrowers, NAB subsidiary UBank introduced a longer-term refinancing product in February to tackle cost-of-living pressures. The move put longer-term mortgages in the spotlight as interest rates soar and indebted households look to cut costs.
Even for more modest loan sizes, interest costs would blow out. Someone borrowing half a million dollars would save $130 a month on a 35-year loan, but pay about $95,000 more in interest over that time.
RateCity’s research director Sally Tindall said it was important all borrowers understand that taking the pressure off the upfront cost would cost them dearly over the life of the loan.
“The sting in the tail is horrifying when you look at the numbers in cold light. It’s an almighty sum to pay in order to get your monthly mortgage repayments down right now,” Tindall said.
“Broadly speaking, anyone who extends their loan term will ultimately pay more if they don’t make extra repayments to catch up at some point … because you’re spreading it over a longer period of time.”
She said while it may not be the first port of call to alleviate mortgage pressures, as a repayment pause or interest-only repayments would be better options, some households will turn to longer-term home loan terms in the current environment.
“Some people will be between a rock and a hard place. Some people will decide this is one of the steps they’re going to take in order to help keep up with their mortgage repayments.
A boom in property prices left buyers with large loans.Credit:Rhett Wyman
“But they need to understand just how much it is going to cost them and understand what steps they need to take to get on track. But you’d want that plan to be ironclad.”
AMP Capital chief economist Dr Shane Oliver also warned new borrowers of the more affordable repayments on longer-term home loans, describing it as “an illusion”.
“If you’re borrowing for a longer period the upfront costs, or the repayments are less, and that may enable you to get into property earlier. It makes property more affordable,” Oliver said.
“But that’s an illusion – the more you have the loan for, the more you’re paying interest. The impact will be quite substantial as the cost of interest compounds.”
For already mortgaged homeowners, who are hurting the most from interest rate rises, Oliver acknowledged the option of refinancing to a longer-term home loan could prevent some from losing their home.
“There’s no doubt for those who are really stretched, and the choice is between refinancing in the longer term, knowing they have to pay more interest, as opposed to losing the house then it may be better going to the longer-term loan,” he said.
“But bearing in mind the main motivation is to get them through higher situation interest rates, and if that goes down they will be wise to be repaying it back faster.
“So you take advantage of the lower upfront cost to stay in the home but as soon as circumstances improve or rates go down you jack up your repayments to get it back to your previous home loan term.”
Mortgage Choice Dee Why principal mortgage broker James Algar said it was far from a mainstream option for most and the fact that very few banks offered the option of longer-term mortgages was in itself a risk.
“The challenge with a 35-year loan term is so few banks do them … where there is minimal competition people may end up stuck with that lender,” Algar said.
“So for the next five years there is very little to no choice of refinancing with an alternative provider.”
Algar said longer-term home loans were one way of softening the landing onto higher interest rates for households who need them, and a product of the property boom.
“That is a symptom of the exponential growth of those property markets.”
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