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Borrowers could have as long as four decades to pay back their home loan. While the practice of offering extended loans has been happening for some time, it fell largely under the radar. In fact, the practice of extending a home loan past the typical 30-year period was something Alma Čustović, Melbourne-based finance broker at Loan Link, said most borrowers weren't even aware of, and therefore was rarely used.
"If it was, it was purely for servicing," Čustović (pictured) told Australian Broker. "It was simply to get them into the loan. I would say the 30-year mortgage is what the majority of people use."
But the track to homeownership along a 40-year route jumped into the spotlight earlier this month when Pepper Money, a non-bank lender, introduced an extended version of its 40-year loan to the market. According to a statement by Pepper, the firm has been offering 40-year loans for roughly 20 years, but only to a select few. The new product allows new borrowers to enter the market.
The move by Pepper could open the door for other lenders to follow suit. As of now, only a few lenders offer term loans longer than 30 years, such as RACQ Bank, Westpac, G&C Mutual Bank and Australian Mutual Bank.
In practice, a 40-year mortgage is a trade-off: The longer loan tacks on an extra decade of repayments and added interest. The difference between a 30-year and 40-year loan on a $650,000 property could be as much as $350,000 over the course of the life cycle, $400,000 on an $800,000 property. But the longer-term loan also lowers monthly payments.
So, is it worth it?
"It really depends on the circumstances and the person, what their objectives and their long-term goals are," Čustović said. "As a broker, you really have to crunch the numbers and find out if they're better off. It all depends on their goals.
"A lot of buyers are hesitant to do it though because of the interest accrued," she continued. "They don't want to drag it out. The larger the principle, the more costs and more expenses over time."
But for first-time homebuyers struggling to get into the market, it would make sense for a broker to recommend a longer loan if it's their only option.
"If it's the choice between a 40-year mortgage and not getting into the market at all, then it's a worthwhile product; it helps," said Damian Collins, founder and managing director of Perth-based real estate investment firm Momentum Wealth.
"It's certainly a more flexible tool and then they can refinance in five years’ time," Collins continued, adding that many borrowers choose to make higher than the minimum payments over time in order to pay off the principle more quickly in exchange for smaller payments upfront.
A statement by Pepper Money highlighted this trend, saying that "most customers pay above the minimum required repayments and don't see out the full 40-year term; most get back on their feet and will refinance their mortgage when their circumstances change. The extended mortgage term hands over more flexibility and control to the customer. They can opt to pay the minimum in times of need, or pay extra when times are good."
Andrew Rennie, a Melbourne-based mortgage broker at Helping Hands Finance, added that while the extra interest isn't ideal, it's about providing alternatives. "It helps if that's all the borrower can afford; if they're really tight financially," he said.
In addition, Rennie pointed out that homeowners routinely refinance to take advantage of better rates. But with the current interest rates still at a high of 4.35% — and estimates as to if and when a rate cut will come in 2025 — he said he's noticed more people are holding off refinancing or moving as of late.
Still, "The reality is that very few people will take out a loan and stay in the same home for the life of the loan," Rennie said.
