Several banks are now offering super-long-term mortgages in response to soaring interest rates, but experts warned that the offers come with a $300,000 hidden cost.
Forty-year mortgages are now being offered by banks, to supposedly help alleviate some of the pressure as surging interest rates force the average Australian to spend an additional $12,000 a year in mortgage repayments.
But although taking on a mortgage for a 35- to 40-year term will slash a few hundred dollars from the cost of monthly repayments, it would also mean that borrowers will have to fork out up to $300,000 in extra interest over the course of the loan, news.com.au reported.
On Feb 6, ubank, a subsidiary of NAB, communicated to affiliates that the 35-year loan terms are now available on both refinance and purchase applications. By expanding the super-long-term offer, which were initially just available for purchases on the lender’s Neat/Own products, customers with an existing home loan can now also refinance to a 35-year term.
For a Ubank borrower with a $500,000 mortgage and 25 years left to pay, it could slash their repayments by $774 per month, but could see them end up paying an extra $66,660 in interest, Canstar analysis showed.
Scott Phillips, chief investment officer at The Motley Fool, slammed the super-long-term mortgage offerings as “dystopian.”
“A 35-year mortgage. Let that sink in. When I bought my first unit, the max length was 25 years,” Phillips tweeted in response to coverage of Ubank’s announcement. “A 40% increase in duration in a couple of decades. And a huge additional interest burden. Exhibit #3522 in ‘Housing policy in Australia is broken’.”
Phillips believed the extra-long loan terms not only meant added cost in interest, but that owning could become no different from renting.
“It should be reasonable in a wealthy country like Australia that you don’t have to spend 35 years paying off a house,” he told news.com.au.
“The idea of owning a home is that, eventually, you don’t have to keep paying to live in it. Once home loan lengths become so long, that’s no longer the case. If a 35-year-old takes out this 35-year mortgage, even if they never move or refinance, they will retire with mortgage debt. If a 40-year-old takes out a 40-year mortgage, they could die with mortgage debt.”
Australian Mutual and RACQ Bank also have similar offerings.
The two banks are now offering highly unusual 40-year mortgages, which could potentially slash the average borrower’s repayments by $550 and $714, respectively, Canstar’s research showed.
The offerings, though, come with a hidden cost: an extra $94,736 and $15,997, respectively, in interest.
A 40-year offering from Pepper Money was even more drastic.
The non-bank lender’s “near prime” loan, designed for customers with less-than-ideal credit ratings, could slash $116 off the average borrower’s monthly repayments, but could rack up a whopping $278,936 extra in interest.
Steve Mickenbecker, Canstar financial services executive, said he was concerned many customers wouldn’t fully grasp how much money they would have to fork out.
“With plenty of people in such stress, this might look desirable,” he told news.com.au. “What this does is, in the short term, reduce the burden of the repayment. But because you’ve reduced your repayments and you’ve extended the loan, there is a very substantial increase to the interest. Nothing comes without a cost, and I suspect that they (borrowers) don’t necessarily understand the magnitude of it. The magnitude is quite staggering.
“If you buy a house with this loan when you’re 35, you’re accepting that you won’t own it outright until you’re in your mid-70s. The concept of repaying the mortgage is still something to be celebrated. If we lose that, people are forced to reconcile that a part of their superannuation will go to finishing off the mortgage, which means their retirement savings could take a serious hit.”
Medina Cicak, RACQ Bank head of lending products and operations, said the bank ensured borrowers knew exactly the added costs they would be incurring before they took on a 40-year loan.
“We rolled out a couple of new options across the last 12 months… to provide our customers with the best loans and achieve their property goals, in response to the current market,” Cicak told news.com.au.
“The 40-year loan is aimed at first entrants into the market, and the terms are based on the age you’ll be at the end of the loan. It’s targeting customers at around the 35-year-old mark. We’re focused on ensuring that, throughout the process, we undergo comparisons calculations to assist in choosing the best loan for every customer.”
RBA’s latest 0.25% cash rate hike will increase mortgage repayments since April 2022 on a $500,000 loan over 30 years by a total of $11,628 per year – that’s more than the combined cost of all other household bills, Canstar said.
Mickenbecker advised borrowers to use the new mortgages only as an “extreme last resort” – and even then, only for the short-term.
“Ask yourself, is this really a measure you want to take, or is there something else you can do that may mean more discomfort in the short term, but leaves you in a better position long-term,” he told news.com.au. “I don’t want to knock this concept. It might help you get through a very tough time; it might mean you don’t lose your house. But it is exceptionally risky.”
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