The deregulation of Australia’s financial sector in the mid-1980s witnessed the birth of a wide range of new loan products and the loosening of credit standards. Where previously 15-year mortgages were the norm, loan terms shifted out first to 25-years and then to 30-years as housing inflation quickly outpaced incomes. Now it appears the next stage in Australia’s mortgage evolution has arrived, with 40-year mortgages creeping into the market:
DESPERATE homebuyers are locking themselves into 40-year mortgages and forking out hundreds of thousands of dollars more in interest costs to do so.
Multiple lenders are offering home loans spanning four decades but experts are concerned about the extended mortgage periods that stretch out across an entire working life.
Data from financial comparison website Finder found there are 17 40-year home loan deals available on the market by seven lenders.
On a $400,000 loan with an average interest rate of 7 per cent the customer would end up forking out an additional $235,000 in interest costs than they would if they chose a 30-year-old loan period…
Some countries including the U.S. have even offered 50-year mortgages and Mr Hedgman said this could be something that would eventually be available in Australia.
The logic behind 40-year mortgages is straightforward. With a longer time period to pay back their mortgage, weekly repayments are reduced, meaning that the same repayment amount can service a greater amount of borrowings. So on the same income, someone taking out a 40-year mortgage can borrow more money, and therefore “afford” a relatively more expensive home than would otherwise be the case.
It’s yet another way that homes are given the illusion of affordability, when all that is really happening is that people are spending a higher proportion of their lifetime’s earnings on housing. Like all demand-side measures, it’s a quick fix to the housing affordability problem that will ultimately do nothing improve home ownership or improve household welfare.
