Customer-owned bank introduces 40-year mortgage for first home buyers

Queensland-based banking and insurance provider RACQ announced it has introduced 40 year terms on select home loans, joining only a handful of Australian lenders that offer home loan terms of that length.

The offer is available on the Mortgage Saver home loan, Mortgage Breaker home loan (Owner Occupied), and 1, 2, 3 and 5 Year Fixed Loans (Owner Occupied).

Importantly, the offer is available exclusively to first home buyers, a younger cohort that’s more likely to struggle with the serviceability requirements of a conventional mortgage.

What should you know about 40-year mortgages?

Stretching a mortgage out over 40 years might make monthly repayments smaller and easier to manage, but the catch is you'll wind up paying much more in interest over the life of the loan.

Some might be willing to set that aside if it means getting on the property market sooner, but borrowers should have a clear idea of what such a lengthy commitment will mean for their finances in the long-term.

The below graph shows the amount you can expect to repay each month on a $500,000 loan with an interest rate of 3% p.a., assuming that mortgage rates remain unchanged over the course of each period.

Of course, official interest rates move up and down in response to economic conditions. While mortgage holders have enjoyed record low rates in recent years, that’s set to change in the coming months as Australia emerges from its lockdown slump.

Borrowers will also have to consider the possibility that their mortgage might spill over into their retirement years. 

According to data from Money.co.uk, the average Australian first enters the property market when they are 36 years old. At that age, taking on a 40-year mortgage would mean making repayments well into your 70s.

However, the availability of 40-year mortgages doesn’t mean that borrowers are required to take their loan to full term.

While the extra breathing space might be appreciated, it’s in borrowers’ best interests to make extra repayments where they can and take advantage of interest saving features like an offset account. 

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