Are 40 year mortgages worth it?

With interest rates at the highest they've been in years, the promise of a 40-year home loan offering lower monthly repayments may look appealing. But there's a catch that you might not have considered, which can actually end up costing you more.  

While most home loans generally last 15-30 years, 40-year home loans take a little longer to pay off. 

Due to the time span used to calculate your monthly repayments, you'll find you may pay less per month. That could be good news if you're worried about your budget, or trying to bring down costs in general. 

However, the catch is — aside from a potentially higher interest rate — you may end up accruing significantly more interest by the time you've paid off your home. 

This is because interest is applied for longer on the amount you borrowed to purchase your property. 

40-year home loans are less common than 15-30 year mortgages, but some lenders in Australia do offer them.

There aren't many lenders in Australia that offer 40-year mortgages. 

Some that do include:

• Pepper Money
• G&C Mutual bank
• Australian Mutual bank. 

As there isn't a lot of competition in this space, you won't have as many rates to choose from when you compare home loans. 

40-year mortgages are more suited to younger, first-home buyers, or those seeking lower monthly repayments who aren't worried about paying more in interest by the end of the loan.

Signing up for a 40-year home loan at the age of 30 would see you finish paying off your home loan a few years after retirement, so that's another consideration to make. 

40-year home loans are also attractive to those with cash-flow issues, or those looking to get their foot in the door of a house above their monthly mortgage budgets, simply due to the lower cost of repayments.

The pros of a 40-year mortgage include lower monthly repayments and the potential to afford a more expensive house. 

The cons are that you are likely to accrue more interest (without the aid of extra repayments), interest rates are often higher than 15-30 year home loans, you stay in debt longer, you build equity slower, and there are less options to compare 40-year home loans. 

Having an extra 10 years on the life of your loan means that there’s more time for interest to accrue. So, the short-term savings you might make with a 40-year home loan could be negated by the extra interest you’ll accrue by adding an extra decade to your loan period. For some, that’s a worry. 

Let’s look at an example of how the length of your home loan affects both your monthly repayments and the overall cost of the loan. 

Monthly repayments

Say Kath borrows $1,000,000 to buy a house. If she is charged an interest rate of 5.5% p.a., her monthly repayments for a 30-year mortgage would be $5,678. However, for a 40-year mortgage they’d be $5,158 — $520 less each month.

Overall cost of Kath's loan

The total interest Kath will have paid on a 30-year home loan adds up to an extra $1,044,041. However, with an extra decade on top, a 40-year home loan racks up $1,475,698. That’s a whopping difference of $431,657 in extra interest. 

Of course, there's a good chance you will refinance your home loan along the way to take advantage of lower interest rates. 

Choosing your home loan period is the classic short-term vs long-term dilemma, which you should definitely take your time deciding on.

As 40-year home loans are rare in Australia, it can be hard to choose between the ones on offer. Here are a few tips and things to think about, which might help you make a more informed decision about one of life’s biggest choices.

Consider the flexibility of your budget

When it comes to choosing how interest is applied to your loan, make sure you consider your budget. That is, how flexible are you if your monthly payments increase with the market rates? If the answer is, ‘I’d rather not think about it’, then it might be a good idea to look into a fixed interest rate. 

Otherwise, there are also variable interest rates, which are good for taking advantage of the low interest rates and more favourable market conditions.

Are there any additional fees?

You should definitely consider how your lender treats additional fees. Some will charge for making early repayments, or maybe they’ll have monthly administration fees. Some lenders also charge discharge fees, which are applied when you exit your loan or pay off your balance in full. 

Before you make your final decision, have a read through the loan’s product disclosure statement (PDS), so you’re aware of any extra fees that you’re agreeing to pay.

Variable rate home loans:

• Rate could rise or fall depending on the market
• You have the option to make extra repayments to pay off your loan sooner and save on interest

Fixed rate home loans

• Lock in your whole home loan’s rate (or just a portion of it) for a set period of time
• Ensures consistency in repayment amounts, making it easier to budget 

Low-doc home loans

• For those who are self-employed or don’t have the necessary proof of income documents
• Higher interest rates to offset the risk for lenders 

Package home loans

• Usually involves packaging your home loan and other financial products together 
• Can come with interest rate discounts and additional incentives, but typically also have an annual package fee which can be several hundred dollars