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Is a 40-year mortgage a good idea?

Buying a home is likely to be one of the most expensive exercises you will make in your financial life.


It can also be a complex process, especially when it comes to finding a home loan that suits you. That being said, would you consider a longer loan term to make the repayments a bit easier?

With some lenders now offering loan terms of up to 40 years, it’s best to weigh up the pros and cons before you consider opting for a longer loan term.

Pros:

Smaller monthly repayments: The longer the term of the loan, the smaller the repayments would be, making them more affordable.

Could be the start you need: A longer loan term and smaller repayments could you to enter the property market, making the loan more manageable from the start.

Plenty of work years to come: It can also be an attractive option for those who have just entered the workforce and have decades of work ahead of them, knowing they are likely to work for the life of the loan.

An option for investors: This loan type may also be an option for investors. With lower repayments, it could create a higher rental yield as well as a larger buffer between rental repayments.

Cons:

More interest: It’s a simple fact that the longer the loan term, the more interest you will pay over the life of the loan.

Too close to retiring: Another downside could be that you might hit retirement before the mortgage is paid off, especially if the longer loan was taken out well into when you started working.

Unforeseen changes: A lot can change over 40 years, both economically and personally – a lot of which may be out of your control. Whether interest rates climb considerably higher or your financial situation changes dramatically, there can be many factors which can alter your ability to make the repayments over a longer period.

A working lifetime: A 40-year loan can span the entire working life of some people, if not a rather significant part of it. Whereas, a shorter loan term allows room on either side of your work life for other things and larger expenses.

A slower build of equity: With a longer loan term, the equity in the property will build at a slower rate. This means that the difference between what you owe on your mortgage, and your home’s current market value increase slowly.

What could the differences of loan terms look like?

Loan term

25 years

30 years

40 years

Interest rate

5%

Loan amount

$350,000

Monthly repayments

$2,046

$1,879

$1,688

Total interest

$263,818

$326,393

$460,088

Total amount

$613,818

$676,393

$810,088

Source: RateCity as at 2nd July, 2019.

If you were to take out a loan for $350,000 at a 5% interest rate (and this rate doesn’t change for the life of the loan), there are some major differences between loan term lengths. If you were to repay the loan within a 25 year period, you could save nearly $200,000 over what you would pay over 40 years. If the loan term is 30 years, you could save just over $130,000.

A 40-year mortgage may look like an attractive option to get onto the property ladder, however, this all comes down to your unique situation. Seeing the potential savings in the long run can well outweigh the initial benefits of a longer mortgage.

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What should you consider?

If you find yourself not seeing a feasible way to pay off the monthly instalments of a 30-year mortgage, it may be worthwhile taking a step back and assessing your options such as starting smaller, buying a smaller place or looking for a different location which could be more affordable.

It pays to consider the long term impacts of a 40-year loan to your finances.

A great way to start your home buying journey would be to talk to an expert. A Mortgage Choice broker can help you search through a wide range of loans from our panel of lenders to find a loan that suits your needs.

Posted in: Home loans
Home loan

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